An Essay On Marxian Economics

AN ESSAY ON
MARXIAN ECONOMICS

Boolcs hy Joan Eobinsm

THE ECONOMIOS OE IMTEEEECT COMPETITION
ESSAYS IN THE THEOBY OF EMPLOYMENT
INTHODHCTION TO THE THEOBY OF EMPLOYMENT

AN ESSAY

ON

MARXIAN ECONOMICS

BV

JOAN ROBINSON

ILLAN AND CO., LIMITED
ST. MARTIN’S STREET, LONDON
1942

COPYRIGHT

FimTTCD IX GBEAT BRlTAtX
BV Hi ft n« CLARK, LIMITED, SDIKBUBOII

FOEEWOED

The purpose of this essay is to compare the
economic analysis of Marx’s Capital with current
academic teaching. The comparison is, in one
sense, a violent anachronism, > for the develop-
ment of Marx’s thought was influenced by con-
troversy with his own contemporaries, not with
mine. But if we are interested, not in the
historical evolution of economic theory, but in
its possible future progress, this is the relevant
comparison to make.

Until recently, Marx used to be treated. in
academic circles with contemptuous silence,
broken only by an occasional mocking footnote.
But modem developments in academic theory,
forced by modem developments in economic life
— the analysis of monopoly and the analysis of
unemployment — have shattered the structure
of orthodox doctrine and destroyed the com-
placency with which economists were wont to
view the working of laisser-faire capitahsm.
Their attitude to Marx, as the leading critic of
capitalism, is therefore much less cock-sme than
it used to be. In my belief, they have much to
Ift ji.rr i from him. The chief difficulty in learn-
ing from biTTi arises from the peculiar language

AN ESSAY ON MARXIAN ECONOMICS

and the crabbed method of argument which he
used, and my purpose is to explain what I
understand Marx to have been saying in language
intelligible to the academic economist.

At the same time, I believe that modem
academic economics has something to offer to
the Marxists. First, a reconsideration of Marx’s
argument in the light of the mbre precise and
refined, methods of modem analysis clears up
many obscurities in his theory, and helps to
reveal its strong and weak points. Second, in
the analysis of effective- demand — the theory
of employment — modem economics prdvides
a basis for the study of the law of motion of
capitalism, which is suggested, but not fully
developed, .by Marx himself. Moreover, both
parties niust gain from attempting to understand
their mutual criticisms, instead of indulging in
ill-informed abuse.

I have confined my argument to Marx’s
economic analysis in the narrow sense, and
made no attempt to deal -with the broad treat-
ment of history and sociology which form the
most important part of Marx’s doctrine. This
specialised approach is perhaps an unnatural
one, and it is true that no particular aspect of
Marx’s argument can be properly understood
■without a grasp of the whole. But at the same
time a detailed study of particular aspects is
also useful, and the aspect which I have chosen
to discuss is one of the liighest unportance in
the development of the whole.

FOEEWORD

The first volume of Das Kapital was published
■ by Marx in 1867. After his death in 1883 Engels
edited the manuscripts for the remaining two
volumes, which consisted partly of finished
sections, and partly of uncompleted or over-
lapping rough drafts. Volume II was published
in 1885 and Volume III in 1894.

There is a good deal of repetition in Capital,
and where I have referred to a particular passage
I have generally chosen somewhat arbitrarily
between a number which make the same point.
The references are intended as a gage of good
faith rather than as a guide to reading Capital.
References are to Capital, Volume I, published
by Glaisher,' 1920 ; Volume II, pubhshed by
Swan Sonnenschein, 1907 ; and Volume III,
published by Kerr, 1909. The references are
numbered, and the title of the chapter and section
in which each passage referred to occurs is given
on pp. 116-20 for the convenience of readers
using other editions.

I am much indebted to Mr. E. Rothbarth for
many helpful discussions and criticisms.

JOAN ROBINSON

Cambbidoi:

September 1941

CONTENTS

noE

Foeewoed V

CHAPTER 1

Intbodttction 1

CHAPTER 2

Definotons 7

CHAPTER 3

TnE Labohe Theory of Valhe . . .11

Appendix : Value in a Socialist Economy . 27

CHAPTER 4

The Long-Period Theory of Employment . 34

CHAPTER 5

The Eallihg Rate of Profit . . .41

CHAPTER 6

Effective Demand ..... 50

CHAPTER 7

The Orthodox Theory of Profit . ... 61

ix

AN ESSAY ON MARXIAN ECONOMICS

■ CHAPTEB 8

The Genb'rMj Theoby of Employment

CHAPTER 9

Impebfect CosiPETmoN .

CHAPTER 10

Real and Money Waoes

CHAPTER 11

Dynamjc Analysis ....

Refebenoes TO “ Capit^ ” . ■

Index ...•••

TAO£

. 75

. 88

. gg

. Ill

. 116
. 121

X

CHAPTER 1

INTRODUCTION

The fundamental differences between Marxian
and traditional orthodox economics are, first,
that the orthodox economists accept the capitahst
system as part of the eternal order of Nature,
while Marx regards it as a passing phase in the
transition from the feudal economy of the past
to the socialist economy of the future. And,
second, that the orthodox economists argue in
terms of a harmony of interests between the
various sections of the community, while Marx
conceives of economic life in terms of a conflict
of interests between owners of property who do
no work and workers who own no property.
These two points of difference are not uncon-
nected — for if the system is taken for granted
and the shares of the various classes in the social
product are determined by inexorable natural
law, all interests unite in requiring an increase
in the total to be divided. But if the possibility
of changing the system is once admitted, those
who hope to gain and those who fear to lose by
the change are immediately ranged in opposite
camps.

1

AH ESSAY ON MABXIAN ECONOMICS

. The • orthodox ecoaoinists. on tlm Tgimio
identified themselves with the sy stem . and
assumed the role of its apologists, wln'lp. Marx set
himself to understand the working of canitalism
i n order to hasten its overthrow . Marx was
conscious of his purposes. The economists were
in general unconscious. They wrote as they did
because it seemed to them the only possible way
to write, and they believed themselves to be
endowed with scientific impartiality. ■ Their pre-
conceptions emerge rather in the problems which
they chose to study and the assumptions on which
they worked than in overt pohtical doctrine.

Since they believed themselves to be in
search of eternal principles they paid little atten-
tion to the special historical features of actual
•situations, and, in particular, they were apt to
project the economics of a community of small
equal proprietors into the analysis of advanced
capitalism. Thus the^ orthodox conception of
competition entails that each commodity in each
market is supplied by a large number of pro-
ducers, acting individualistically, boxmd together
neither by open collusion nor by unconscious
class loyalty ; and entails that any individual
is free to enter any line of activity he pleases.
And the laws derived from such a society are
applied to modern industry and finance.

Again, the orthodox conception of wages
tending to equal the muTgincil disutility of labour,
which has its origin in the picture of a peasant,
farmer leaning on his hoe in the evening and
■ 2

INTRODUCTION

deciding whether the extra product of another
hour’s work will repay the extra backache, is
projected into the modem labour market, where
the individual worker has no opportunity to
decide anything except whether if is better to
work or to starve.

The orthodox economists have been much -
preoccupied with elegant elaborations of minor
problems, which distract the attention of their
pupils from the uncongenial realities of the
modem world, and the development of abstract
argument has run far ahead of any possibility of
empirical verification. Marx’s intellectual tools
are far cruderj but his sense of reality is far
stronger, and his argument towers above their
intricate constmotions in rough and gloomy
grandeur.

He sees the capitalist' system as fulfilling a
h istoric mission to draw out the productive
power, of combined and specialised labour.
IVom its birthplace in Jflurope it stretches out
tentacles over the world to find its nourishment.
It forces the accumulation of capital, and
develops productive technique, and by these
means raises the wealth of mankind to heights
undreamed of in the peasant, feudal or slave
economies.

But the workers, who, under the compulsion
of capitalism, . produce the wealth,, obtain no
benefit from the increase in their productive
.power. All the benefit accrues to. the class of
capitahsts, for the efficiency of large-scale enter-
3

AN ESSAY ON MARXIAN’ ECONOMICS

prise breaks down the competition of the peasant
and the craftsman, and reduces all who have
not propertj’^ enough to join the ranks of the'
capitalists to selling their labour for the mere
means of existence. Any concession which the
capitalist makes to the worker is the concession
- which the farmer makes to his beasts — to feed
them better that they may work the more.

The struggle, for life binds the workers
•together and sets them in opposition to the pro-
pertied class, while the concentration of capital
in ever larger concerns, forced on by the de-
velopment of technique, turns the capitalists
towards the anti-social practices of monopoly.

But the condemnation of the system does not
onl}’’ depend upon its moral repugnance, and the
inevitability of its final overthroit does not only
depend upon the determination of the workers ■
to secure their rightful share in the product of
their labour. The system contains contradictions
within itself which must lead to its disruption.
Marx sees the periodic crises of the trade cycle
as symptoms of a deep-seated and progressive
malady in the ■vitals of the system.

Developments in economic analysis which
have taken place since Marx’s day enable us
to detect three distinct strands . of thought in
Marx’s treatment of crises. There is, first, the
theory of the reserve army of unemployed
labour, which shows how unemployment tends
to fluctuate with the relationship between the
stock, of capital offering emp^ment to labour

INTRODUCTION ,

and the supply of labour available to be
employed. Second, there is the theoiy of the
falling rate of profit, which shows how the
capitalists’ greed for accumulation stultifies
itself by reducing the average rate of return on ■
capital. And thirdly, there is the theory of the
relationship of capital -good to consumption-
good industries, which shows the ever-growing
pfoductive power of society knocking against
the limitation upon the power to consume
which is set by the poverty of the workers.

In Marx’s mind these three theories are not
distinct, and are fused together in a single
picture of. the system, racked by its own inherent
contradictions, generating the conditions for its
own disintegration.

Meanwhile, the academic economists, without
paying much attention to Marx, have been
forced by the experiences of modem times to
question much of the orthodox apologetic, and
recent developments in academic theory have
led them to a position which in some respects
resembles the position of Marx far more closely
than the position of their own intellectual fore-
bears. The modern theory of imperfect com-
petition, though formally quite different from
Marx’s theory of exploitation, has a close afSnity
with it. The modem theory of crises has many
points of contact with the third line of argument,
distinguished above, in Marx’s treatment of the
subject, and allows room for something r'esem- '
bling the first. Only the second line of argument
6

AN ESSAY ON JIAEXIAN ECONOJIICS

— the falling rate of profit — appears confused
and redundant.

In general, the nightmare qualitjr of Marx’s
thought gives it, in this bedevilled age, an air of
greater realit}' tlian the gentle complacenc3r of
the orthodox academics. Yet he, at the same
time, is more encouraging than they, for he
releases hope as well as terror from Pandora’s
box, while thej' preach onl}’’ the gloomy doctrine
that all is for the best in the best of all possible
worlds.

But though Marx is more sympathetic, in
manj’^ ways, to a modern mind, than the orthodox
economists, there is no need to turn him, as
man}'’ seek to do, into an inspired prophet. He
regarded himself as a serious thinlcer, and it is
as a serious thinker that I have endeavoured to
treat him in the following pages.

The next five chapters contain an outline of
Marx’s argument, looked at from the point of
view of a modern academic economist, . Chapter
7 contrasts liis theorj'^ with the orthodox doc-
trine. Chapters 8 and 9, on the theory of
emplojonent and imperfect competition, show
the movement of modern academic teaching
aw’ay from orthodoxy in the direction of Marx.
Chapter 10, on wages, discusses a problem in
which the movement has been in the opposite
direction, so that Marx for once appears, from
the modern point of view, to be in the orthodox
.camp. Chapter 11 briefly enumerates the un-
solved problems which all tliree parties leave open.

6

CHAPTER 2

DEFINITIONS

Marx divides the net product of industry into
two parts : variable capital and surplus. Variable
capital {v) is the wages hiU.^ Surplus (s), which
covers net profit, interest and rent,® is the excess
of net product over wages. The difference be-
tween gross and net product is constant capital
(c), which consists of plant and raw materials.
It is constant in the sense that it adds no more
to the value of output than it loses in the process
of production, new value added being due to the
labour-power purchased by variable capital.®
Fixed plant contributes to c only in respect to
its rate of -wear and tear and depreciation.*
Thus c consists of depreciation raw materials.

The total product for any period, say a year, is
then represented by c+v-i-s. These quantities
are measured in value, or socially necessary
labour-time.^ This concept involves some prob-
lems which will be discussed in the next chapter.

Marx conducts his argument in terms of three

» Vol. I, p. 192<»). •

» Vol. I, p. 194<»> and VoL HI, p. 903B1.

• Vol. I, p. See also below, p. 16.

‘ Vol. I, p. 196<*), - B Vol. p. 5{*).

B

7

AN ESSAY ON MARXIAN ECONOMICS
ratios : the rate of exploitation,^ the organic

composition of capital,^ and the rate of proftl.’‘

The rate of exploitation, is the ratio of

V

surplus (net profit, interest and rent) to wages,
and indicates the share of labour in net output.
Marx often expresses it as a division of the work-
ing day into the time whieh a man works for
himself and the time which he works for the
s 3

capitalist. Thus if - equals g, and the worldng

day is 10 hours, a man works 4 hours for himself
and 6 hours for liis employer. He does 4 hours of
“ necessary ” or “ paid ” labour, and 6 hours of
“ surplus *’ or “ unpaid ” labour.* This ratio
plays the leading part in Marx’s whole argument.
The rate of exploitation is unambiguous.

The other two ratios, - and , involve some

V c+v

confusion. Both the organic composition of
capital and the rate of profit are connected with
the stock of capital employed, not with the
depreciation of capital. To turn c + v into the
stock of capital we must refine upon Marx’s
categories and break up c into depreciation and
raw materials, say d and r. Then r + v and d
must each be multiplied by the appropriate
period of turnover. Suppose, for instance, that

• Vol. I, p.

» Vol. m, p. 66»).

a Vol. I, p. O20<»).
‘ Vol. I, p. 19fl(i»>.

DEFINITIONS

working capital represents on average six-
months outlay on wages and raw materials, and
that the average life of plant is ten years. Then
r + v must be divided by 2, and d multiplied by
10, in order to reduce 6 + v to the stock of capital.
Marx was aware of these points, ^ but his ter-
minology obscures them. We can avoid am-
biguity, Avithout falsifying Marx’s meaning, if
we use the symbols c, v and s only for rates per
unit of time of depreciation and raw material
cost, wages and profit, and speak of the organic

composition of capital, not as -, but as capital

per man employed.

The conception of capital per man employed
raises a further difficulty. It can vary in three
different ways. Slump conditions increase capital
per man simply by reducing the level of em-
ployment while equipment remains unchanged;*
the process of accumulation tends to increase
capital per man at a given level of utihsation ;
finally, technical progress and changes in the rate
of interest and of real wages may alter capital
per man (given utilisation) in either direction.
Marx assumes that capital is always used to

* Vol. n, p. and VoL lU, chap. This chapter was

supplied by Engels, a sign, perhaps, that Jdarz found the subject
perplexing or tedious.

‘ ^ince Marx does not discuss this question explicitly, it is doubt,
ful how he regarded it. He might be interpreted as regarding a
decline in utilisation as equivalent to a reduction in capital. But
this method of reckoning is excessively awkward, for it means that
the rate of change of the stock of capital is not the same thing
as the rate of accumulation.

9

AN ESSAY ON MARXIAN ECONOMICS

capacity Moreover, he assumes that the capacity
output of a given amount of capital is rigidly
determined hy technical conditions. The rate of
interest has no-mfluence on the capital structure,
and the rate of real wages affects it only in-
directly, through its influence on technical pro-
gress.*®

These assumptions are fundamental to his
whole argument. They rule out two sets of
problems which, since Marx’s day, have received
mueh attention from academic economists : prob-
lems connected with the propCrtions of the factors
of production employed in equilibrium, and prob-
lems connected with changes in the utilisation of
capital equipment in response to changes in the
state of trade.' These points will be discussed
later. The assumptions make a drastic simplifi-
cation of a very complex problem, and, from an
academic point of view, appear somewhat crude.
But Marx avoids using certain no less drastic
simplifications which the academic economists
have -become accustomed to employ, and he
conducts his argument in dynamic terms, while
they are for the most part confined to a more
exact but less interesting analysis of static
conditions.

^ This assumption is not stated explicitly, but it is taken for
granted that, in a given state of technique, there is only one amount
of labour that a given amount of capital TnU employ, e.ff, Vol. Ill,

p.

2 Vol. I, p. 653^^4^.

10

CHAPTER 3

THE LABOUR THEORY OP VALUE

Mabx’s theory of value has caused much con-
fusion and generated much controversy. It
seems, certainly, perplexing as we follow the
uphill struggle of Marx’s o^vn mhid from the
simple dogmatism of the first volume of Capital
to the intricate formulations of Volume III.
But if we start from the vantage ground of
Volume III the journey is much less arduous.

Capital is accumulating, the capitalist system
is conquering fresh spheres from peasant and
handicraft economies, the population is increas-
ing and technical inventions are being made.
.Real wages, in general, remain constant at the
level established in the pre-capitalist peasant
economy,! or, rather, fluctuate around that level
as capitalists’ demand for labour varies relatively
to the available supply.* The total surplus, in
real terms, is the ever-increasing difference be-
tween total output and total real wages. The
organic composition of capital, dictated by
technical conditions, is different in different
spheres.® The rate of profit on capital tends

* See belowi p. 35, n. 3. * Soo below, p. 37. ® Vol, III, p. 172^**^

11

AX ESSAY OX IIAKYIAX ECOXOMICS

to-R-ards equality iu all spheres, for the flovr of
ueu- capital is attracted to-vrards more tlimi
average profits and repelled by less than average
profits.* Temporary. differences in the rate of
profit in particular industries may be due to
demEuid (which in turn is determined by the
distribution of income between workers and
capitalists).® These are evened out by a relative
increase in capital, and therefore in output,
where demand is relatively high.® Or they may
be due to new techniques, winch lower costs of
. production. These are evened out by the action
of competition, which gradually forces the general
adoption of the new methods, and lowers the
price of the commodity concerned.* Since profit
per unit of capital tends to be equal, and capital
per man* employed is not equal, the rate of
exploitation (profit per man) is not equal, in
different industries. It tends to be above the
average where capital per man is above the
average.®

Where available land is limited, and varies in
respect to fertility and site-value, private pro-
perty jn land enables its owners to exact a rent
from the capitalists.® Rent is paid out of the
surplus obtained by capital, but since profit per
unit of capital tends to equahty in all lines of
activity, the rate of exploitation must be higher
the greater the rent that is paid. This is brought
about by a rise in the relative prices of the com-

» Vol. nr, p. SSOO'* and p. = Vol. HI, p. 2U<“'.

= Vol. m, p. 22400. * Vol. ni, p. 22SO»).

5 See below, p. 18. • Vol. HE, p. 75S<“> and p. 701<«>.

12

THE LABOUB THEORY OF VALUE

moditiea concerned, as production is extended by
the use of less efficient land and more intensive
utilisation of more efficifent land.^ Thus relative
prices are governed by demand and by costs,
while costs in turn are influenced by technique
and by the supply of natural factors of produc-
tion, and demand is influenced by the distribu-
tion of income.

AU this differs from ort hodox theory in on ly
one respect, but that is an important one. There
is no tendency to long-run equilibrium and the
average rate of profit is not an equilibrium rate,
or a supply pr ice of capital. It is simply an
average share in the total surplus which at any
moment the capitahst syst em has succeeded in
g enOTatin g. — —

As the argument is presented in Volume I it
appears on the surface to be very different, but
the differences arise from what is omitted rather
than from what is included in the analysis. We
start from a purely dogmatic statement. “ The
exchange values of commodities must be capable
of being expressed in something common to
them all, of wliich they represent a greater or
less quantity. ... A use- value, or useful article,
has value only because human labour in the
abstract has been embodied or materiahsed in it.

^ Vol. Ill, p. 773^”* and p. Marx’s treatment of rent is

more realistic than the usual academic exposition. He allows for
improvements in technique and so has no presumption in favour of
Himinighlng returns to capital (p. 907)^*^^ It is interesting to note
that he realises how ** rent enters into cost of production ’’ for a
particular commodity : the rent of cereal land becomes a deter*
mining element in the price of cattle ” (p. 802)^>*).

13

AJSr ESSAY ON MARXIAN ECONOMICS

How, 'then, is the magnitude of this value to
be measured ? Plainly, by the quantity of the
value-creating substance, the labour, contained
iu the article. The quantity of labour, however,
is measured by duration, and labom'-time in its
turn finds its standard in weeks, days, and hours,”^
The standard of measurement is labour of
average quality, “ All labour of a higher or
more complicated character than average labour
is expenditure of labour-power of a more costly
kind, labour -power whose production has cost
more time and labour,® and which therefore has
a higher value, than unskilled or simple labour-
power. ... In every process of creating value,
the reduction of skilled labour to average social
labour, e.g., one day of skilled to six days of
unskilled labour, is unavoidable. We therefore
save ourselves a superfluous operation, and
simplify our analysis, by the assumption, that
the labour of the workman employed by the
capitalist is unskilled average labour.” *

The value of a commodity consists not.only of
1 Vol. I, pp. 4-6<">.

^ The excess of a sIdllGd man’s wage over an unskilled would be
limited by 'the greater cost of hie education, in a world of free
mobility and equal opportunity. In reality, the supply of skilled
workers (and still more, of professional workers) is restricted by the
fact that 'the families of unskilled workers cannot generally allow
their children time for any education at all above the statutory
minimum. The extra wages of skilled men, therefore, measure not
only "their cost of 'training, but also a scarcity value artificially
created by the structure of society, l^arx neglected this somewhat
obvious point, no doubt because he was anxious to stress the major
/»inqa oouflict between capitalists and workers as a whole, and did
not want to complicate the picture by allowing for subsidiary con-
flicts within each class. See also below, p. 109, n. 2.
a Vol. I, pp. 179.80<«).

14

THE LABOUE THEORY OF VALUE

the labour-time directly employed in producing
it, but also of the value of the raw materials and
plant involved. “ The values of the means of
production used up in the process are preserved,
and present themselves afresh as constituent
parts of the value of the product.” ^ “ The

means of production . . . give up to the product
that value alone which they themselves lose as
means of production.” * The value of raw
materials, and auxiliary substances such as fuel,
pass immediately into the value of the product,
while equipment transfers to the product the
valvLe which it loses by wear and tear.® The
value of means of production, in turn, is derived
from the labour-time which is required to pro-
duce them, and “ means of production supplied
by Nature without human assistance, such as
land, wind, water, metals in situ, and timber in
virgin forests ” transfer no value to the product.*
Thus all value is created by labour.

Whatever inward meaning the conception of
value may have had for a student of Hegel, to a
modem English reader it is purely a matter of
d efini tion. The valvA of a commodity consists of
the labour-time required to produce it, including
the laboim-time required by subsidiary com-
modities which enter into its production.

What is the relationship of value to price ?
At first Marx states dogmatically that com-
modities tend to exchange at prices which cor-

» Vol. I, p. I80(«). • Vol. r, p. 185<«).

»■ Vol. 1, pp. 18B-6<«>. ‘ Vol. I, p. 1860«.

IS

AN ESSAY ON l^RXIAN ECONOMICS'. -

respond to their values (so that the ratio of the
prices of ' any group of commodities is the same
as the ratio of their values). “Price is the
• money-name of the labour realised in a com-
modity.” ^ Relative prices may differ from
relative values, as a result of some temporary
disturbance in the market, “ but these deviations
are to be considered as infractions of the laws
of exchange of commodities

The definition of value has to be stretched and
strained a good deal in order to make it possible
for Marx to maintain that prices tend to cor-
respond to values. To create value, in Marx’s
system, labour-time must be socially necessary.
The labour-time socially necessary to produce a
given output of a commodity may vary for two
distinct sets of reasons. If a new labour-saving
process is introduced, the socially necessary
labour-time embodied in the commodity con-
cerned is reduced, and its value consequently
falls.® But demand also influences valve. No
commodity embodies valve unless there is a
demand for it, and, where there is over-produc-
tion of a particular commodity, part of the labour
embodied in it. turns out not to have been
necessary to meet the social demand, and the
average value of the total output of the com-
modity concerned is consequently reduced.*
Natural factors of production create no value.,
but it is assumed that the scarcity, for instance,

1 Vol. I, p. 74<s»>. “ Vol. I,’p. 136P*). •» Vol. I, p. 0<“>.

* Vol. I, p. 80O'>. Cf. Vol. HI, p. 746<“’>.

16

• THE LABOUR THEORY OF VALUE

of diamonds, increases the labour-time devoted
to searching for them to a sufficient extent to
account for their high price.^ Thus the formula-
tion of Volume I slurs over a number of problems
which are clearly distinguished in Volume III.

The main problem, however, Marx does not
attempt to deal with in Volume I at all. This
concerns the tendency of the rate of profit to
equality in different lines of production. In a
system in which prices correspdhd to valiies the
net product of equal quantities of labour is sold
for equal quantities of money. Thus (given
unif orm money-wage rates) surplus, in terms of
money, per unit of labour is everywhere equal.
To say that relative prices correspond to relative
values is the same thing as to say that the rate
of exploitation is equal in aU industries. But if
capital per man employed (the organic composi-
tion of capital) is different in different industries,
while profit per man (the rate of exploitation) is
the same, profit per unit of capital must vary
inversely with capital per man. It would be
possible for both the rate of profit and the rate'
of exploitation to be equal in aU industries only
if the ratio of capital to labour employed were
also equal.

In Volume, I Marx leaves this question open.®
In Volume III, he shows that capital per man
varies with technical conditions, while com-
petition between capitalists tends to establish a
uniform rate of profit. The rate of exploitation

' Vol. I, p. T'"’). = Vol. I, p. 293<”>.

17

AN ESSAY ON MARXIAN ECONOMICS

therefore cannot be uniform, and relative prices
do not correspond to values.^ -

Marx entangled himself in an artificial diffi-
culty by starting from the assumption of a
uniform rate of exploitation. There is no
warrant for this assumption. If wages are equal
in all industries, surplus per man employed (the
rate of exploitation) varies with net productivity
per man employed, and, in general, productivity
per man is greater where capital per' man is
greater. In Marx’s own words : “ The prevailing
degree of productive power shows itself in the
relative preponderance of the constant over the
variable capital. ... If the capital ia a certain
sphere of production is of a higher composi-
tion [than the average] then it expresses a de-
velopment of the productive power above the
average.” * Thus the rate of e:!^loitati6n tends
to vary with capital per man employed. '

^ Vol. Ill, p. 185^**^^ In his numerioal example IHIarx cEdculates
the values of the commodities produced in the different industries
iinm the average rate of exploiUition in industry as a whole. But
the prices of the commodities differ from their values in such a way
as to make tlie rates of exploitation actually enjoyed by tlie
capitalists in the different industries vary with the organic com*
position of their capitals. As I see it, the conflict between Volume I
and Volume HZ is a conflict between mysticism and common sense.
Li Volume HI common sense triumphs but must srill pay lip-service
to mysticism in its verbal fonnulations.

* Vol. Ill, p. 881**'!. In the preface to Volume IH (p. 26)
Sngels quotes Julius Wolf : A plus in constant capital has for its
premise a plus in the productive power of the labourers. . . . There-
fore, if the variable capital remains the same and the constant
capital increases, suiplus value must also increase.** Engels re-
pudiates this view with indignation, and declares it to be directly
contrary to Marx*s theory. But he merely abiwes Wolf, without
entering into €Uiy argument, and it is impossitle to see wherein
Wolf’s statement differs from the above statement by Marx.

18

THE LABOUR THEORY OF VALUE

The capitalists can • be relied upon to see
(apart from errors of judgment and perturbations
in the market) that they do not increase capital
per man employed -unless they are assured of a
corresponding increase in net profit per man
employed, and the very same process which
produces an equal rate of profit between in-
dustries produces unequal rates of exploitation.

There is no reason why the rate of exploita-
tion should be treated as either logically or
historica% prior to the rate of profit. Logic-
ally, what is important is the total amount of
surplus which the capitalist system succeeds in
acquiring for the propertied classes, and there is
no virtue in dividing that total by the amount
of labour employed, to find the rate of exploita-
tion, rather than by the amount of capital, to
find the rate of profit. Historically, it is natural
to suppose that different iridustries are developed
with widely varying rates of exploitation, varying
rates of profit, and varying ratios of capital to
labour. The push and puU of competition then
tends to establish a common rate of profit, so
that the various rates of exploitation are forced
to levels wliich offset differences in the ratio
of capital to labour. The movement from an
equal rate of exploitation towards an equal
rate of profit is not a process in the develop-
ment of capitahsm, but a process in the de-
velopment of economic analysis, from the
primitive labour theory of value towards a
theory of the interaction between relative
19

AN ESSAY ON MARXIAN ECONOMICS
demands and relative costs.

According to Marx’s own argument, the
labour theory of value fails to provide a theory
of prices. He used it nevertheless to express
certain ideas about the nature of the capitalist
system, and the importance of these ideas in no
way depends upon the particular terminology in
which he chose to set them forth.

First of aU, Marx shows that the develop-
ment of the capitalist system is founded on the
existence of a class of workers who have no
means to live except by selling their labour-
power, Capitalism first expropriates the peasant
and the artisan,^ and then exploits their labour.
The possibility of exploitation depends upon the
existence of a margin between total net output
and the subsistence minimum of the workers.*
If a worker can produce no more in a day than
he is obliged to eat in a day, he is not a potential
object of exploitation. This idea is simple, and
can be expressed in simple language, without any
apparatus of specialised terminology. But it is
precisely these simple and fundamental charac-
teristics of capitalism that are lost sight of in the
mazes of academic economic analysis.

Next, Marx uses his analytical apparatus to
emphasise the view that only labour is product-
ive.® In itself, this is nothing but a verbal
point. Land and capital produce no value, for

» Vol. I, Tart VTTT, “ The So-caUed Primitive Accumulation ”.

2 Vol. I, p. ; Vol. in. p.

“ Vol. I, p. 1SS1“1 ; Vol. m, p. 963'*'>.

20

THE LABOtTB THEORY OF VALTJE

value is the product of labour-time. But fertile
land and efficient machines enhance the pro-
ductivity of labour in terms of real output, and,
indeed, “ there is immanent in capital an inclina-
tion and constant tendency, to heighten the
productiveness of labour”.* Under capitalism
“ the productiveness of labour is made to ripen,
as if in a hot-house”.® 'Rffiether we choose to
say that capital is productive, or that capital is
necessary to make labour productive, is not a
matter of much importance.

What is important is to say that owning
capital is not a productive activity. The
academic economists, by treating capital as pro-
ductive, used to insinuate the suggestion that
capitalists deserve well by society and are fully
justified in di'a\ving income from their property.®
In the past, a certain superficial plausibility
could be given to this point of view by treating
property and enterprise as indistinguishable.
But this method of confusing the issue is no
longer efiective. Nowadays the divorce between
ownership and enterprise is becoming more and
more complete, and “ the last illusion of the
capitalist system, to the effect that capital is the
fruit of one’s o^vn labour and saving, is therebj’^
destroyed ”.® , The t3rpical entrepreneur is no
longer the bold and tireless business man of
Marshall, or the sly and -rapacious Moneybags
of Marx, but a mass of inert shareholders, indis-

> Vol. I, p. 300(“>. * Vol. I, p. G41<”l.

» or. Vol. I, p. 443«'>. ‘ Vol. in, p. 607<*».

21

AN ESSAY ON MARXIAN ECONOMICS

tinguishable from rentiers, who employ salaried
managers to run -their concerns. Nowadays,
therefore, it seems simple to- say that owning
property is not productive, without entering into
any logic-chopping disputes as to whether land
and capital are productive, and without erecting
a special analytical apparatus in order to m sh e
the point.

Indeed, a language which compels us to say
that capital (as opposed to ownership of capital)
is not productive rather obscures the issue. It
is more cogent to say that capital, and the
application of science to industry, are immensely
productive, and that the institutions of private
property, developing into monopoly, are dele-
terious precisely because they prevent us from
having as much capital, and the kind of capital,
that we need. This view is inherent in Marx’s
analysis. He foresaw the time when “ the
monopoly of capital becomes a fetter upon the
mode of production, which has sprung up and
flourished along with, and under it. Centralisa-
tion of the means of production and socialisation
of labour at last reach a point where they
become incompatible with their capitalist integu-
ment.” ^ The substance of Marx’s argument is
far from being irrelevant to the modem situation,
but the argument has become incompatible with
its verbal integument.

The increasing productive power of labour
under capitalism gives rise to a serious awkward-
1 Vol. I, p. 789««>.

22 ■

THE LABOUR THBOB’S OF VALUE

liess in Marx’s terminology. His method of
measuring output in terms of vcdm short-
circuits the index-number problem (though it
leaves open the problem of assessing labour of
difEerent degrees of skill in terms of a unit of
“simple labour”^). But since real output is
an important concept, the problem must be
dealt with, and not merely ignored. So long as
man-hours of labour, of given intensity, are
constant, the total valiie created per unit of time
is constant. But, as time goes by, output in
real terms is increasing. The voZwe of com-
modities is constantly falling, and, s.o long as
real wages are constant, the value of labour-
power is also falling. The purchasing power of a
given value of variable capital over labour-power
is therefore increasing. The problem of finding
a measure of real output — a measure which in
the nature of the case must contain a certain
arbitrary element — is not solved by reckoning
in terms of value, for the rate of exchange
between value and output is constantly altering."

The . simplest method of handling Marx’s
apparatus is to postulate a given money-wage

^ See above, p. 12.

^ Mr. Keynes fells into the same error. He suggests that the fact
that he finds it possible to reckon ou^ut in terms of wage-units is
somehow connected with the idea that labour is the sole factor of
production {General Theory of Stnphymentt Interest and Money,
p. 214). But this has nothing to do with the case. He con reckon in
wage-units because he is chiefly interested in analysing short-period
situations, In which capital equipment is given, so that real output
is correlated with employment. As’ soon as output per man, at a
given level of employment, begins 'to alter, the wage unit ceases to
measure real output.

23

o

AN ESSAY ON MARXIAN ECONOanCS

rate per hour. Then if real hourly wages are con-
stant, pri ces must also be constant (assuming that
wage-good prices do not alter relatively to prices
in general). As the real output from a given
amount of labour-time increases, a constant rate
of creation of value (v-t-s) is represented by an
increasing total of money, and the value of a
unit of money is falling. The rising rate of ex-
ploitation is then expressed by a constat v and
a rising s, in money terms. Alternatively, the
value, of a unit of money may be taken as constant.
Money wages and prices are then falling as pro-
. ductivity increases ; w + « is constant, and the ris-
ing rate of exploitation is expressed by a faU in v.

The awkwardness of reckoning in terms of
value, while commodities and labour-power are
constantly changing in value, accounts for 'much
of the obscurity of Marx’s exposition, and none
of the important ideas which he expresses in
terms of the concept of value cannot be better
expressed without it.^

But the terminology which Marx employs is

^ An instructive 'exunple of Marx’s method of argument is his
treatment of oonuneroe (Vol. HI, chap. 17^®^^). Labour employed in
selling commodities, in packing and preparing them for the market,
and in book-keeping, creates no value. It is merely engaged in realis-
ing value created in industzy. Transport, on the other hand, does
create value (loo, eit. p. 340). The distinction is clearly important. *
Industry and transport are necessa^ to society in a sense in which
the activity of searching for buyers is not, and in the present age of
advertisement the distinction between production costs and selling
costs is even more significant than it was in Marx’s own day. But
Marx creates an - unnecessary puzsde for himself by posing the
question — What is the source of the wages and profits earned in
oonunercial enterprise, and how is the commercial capital preserved,
when no value and no surplus is directly created by commerce !

24

. THE LABOUR THEORY- OR VALUE

important because of its suggestive power. No
school of economics has ever used a perfectly
colourless terminology. Overtones ring in the
mind of the reader, even if the -writer believes
himself to be coldly scientific. - Marshall’s use of
the term waiting provides an example of verbal
suggestion. He is concerned to show that it is
necessary for the owners of wealth to receive
interest, in order to overcome the temptation to
dissipate their capital in present consumption.
It would be natural to draw the moral that if
capitalists have to be bribed to keep their capital
intact, they ought rather to be expropriated, and
their capital put into safe keeping for the benefit
of society. But Marshall, while he regards ab-
stinence as too strong a term, represents them as
performing the service of waiting, for which they
have a right to be rewarded.^ Professor Pigou
uses the word exploitation, highly charged -with
opprobrious implications, for the difference be-
tween real wages under perfectly competitive

The industrial capitalist is not interested in acquiring value, but in
acquiring money, or rather purchasing power over commodities and
labour, and he is prepared to pay the commercial capitalist, and,'
indirectly, the commercial labour, which assists him to realise his
surplus — that is, to sell his commodities, The question of the
amount of value involved is purely formal. If we choose to reckon
commercial labour as productive, the total value created is so much
the greater, and the average value of commodities is correspondingly
greater, eve^thing else remaining the same. It is obviously some-
what arbitrary where the line is drawn, and the more labour is counted
as productive the greater the average value of commodities. The
ohoice as to where to draw the line alTects nothing except the rate
of exchange between value and money.

A similar obfuscation of a simple point is to be found in Chap. 46
of Volume HI on Absolute Ground-Rent ”,

^ Prindplee of JBconomioef p. 232. See below, p. 64.

25

AN ESSAY ON IVIARXIAN ECONOMICS

conditions and under monopoly, ^ so that the
reader is unconsciously lulled into the conclusion
that, as long as competition prevails, labour
•receives all that it can r^htly claim. A hundred
instances could be found in academic usage.

Marx Tvas very much alive to the importance
of suggestion. He sho'ws how even an alge-
braical formula is not iimocent of political
implications. He insists that the rate of

. exploitation must be -written not — The

V s+v

two formulations express precisely the same
situation, but they imply two different attitudes

to the capitalist process. The ratio - expresses

the “ real fact ” of the “ exclusion of the
labom’er from the product ” of his work, while

the ratio — — presents the “ false semblance of

an association, in which labourer and capitalist
divide the product in proportion to the different
elements which they respectively contribute
towards its formation

Marx’s method of treating profit as “ unpaid
labour ”, and the whole apparatus of constant
and variable capital and the rate of exploitation,
keep insistently before the mind of the reader a
picture of the capitalist process as a system of
piracy, preying upon the very life of the workers.
His terminology derives its force from the moral

* Mconomics of Welfare, Part III, chap. 14.

» Vol. I, p. 643»»>.

26

THE LABOUR THEORY OF VALUE

indignation with which it is saturated.

r hope that it will become clear, in the
following pages, that no point of substance in
Marx’s argument depends upon the labour theory
of value. Voltaire remarked that it is possible
to kill a flock of sheep by witchcraft if. you give
them plenty of arsenic at the same time. The
sheep, in this figure, may well stand for the
complacent apologists of capitalism ; Marx’s
penetrating insight and bitter hatred of oppres-
sion supply the arsenic, while the labour theory
of value provides the incantations.

A'ppmdix

VALUE DSr A SOCIALIST ECONOMY

While abandoning the view that prices cor-
respond to values under capitalism, Marx believed
that, under socialism, the labour theory of value
would come into its own. “ Only when pro-
duction will be under the conscious and pre-
arranged control of society, will society establish .
a direct relation between the quantity of social
labour -time employed in the production of
definite articles and the quantity of the demand
of society for them. . . . The exchange, or sale,
of commodities at their value is the rational way,
the natural law of their equilibrium.” ^ FoUow-
1 Vol. ni, p. 221<“).

27

AN ESSAY ON IHABXIAN ECONOMCS

ing an example to illustrate differential rent, in
which 10 quarters of wheat, whose cost, excluding
■ rent, is 240 shillings, are sold for 600 sln'llingg
he UTrites : “ If we imagine that the capitalistic
form of society is ahohshed and society is
organised as a conscious and systematic associa-
tion, then those 10 quarters represent a quantity
of independent labour, which is equal to that
contained ini 240 shillings. In that case society
would not buy this product of the soil at two
and a hah times the labour contained in it. The
basis of a class of land owners would thus be
destroyed, Tliis w'ould have the same effect as a
cheapening of the product to the same amount
by foreign imports.” ‘

“ In the case of socialised production . . .
the producers may eventually receive paper
cheques, by means of which they mthdraw from
the social supply of means of consumption a
share corresponding to their labour-time.” ‘

“ After the abohtion of the capitalist mode of
production, but with social production , still in
vogue, the determination of value continues to
prevail in such a way that the regulation of the
labour time and the distribution of the social
labour among the various groups of production,
also the keeping of accoimts in connection with
this, become more essential than ever.” ®

The major point which emerges from these

‘ Vol. m, p. 773<“>. » Vol. H, p.

’ Vol. ni, p. 892*“>. Marx also makes Bobinson Crusoe, the
typical ooonomio planner, keep- his accounts in twins of nverago
labour^timo. Vol. I, p. ‘ .

28

THE LABOUR TipiORY OF VALUE

passages is that under socialism income from
propertj' will he abolished and each individual
will receive a share in the total product corre-
sponding to his OUT! contribution to it. This
reflects the substantial meaning of Marx’s
theory, .which can always be expressed without
using the concept of value. But these passages
also imply that, in a rational economic system,
prices should be made to correspond to the
values of commodities.

How would a system work in which prices are
regulated by values ? Marx regards depreciation
of capital as entering into the value of output,
and clearly we must include it, for the object of
the ideal pricing system is to make the prices of
commodities correspond to their costs to society,
and wear and tear of plant is a real cost.‘

In the simplest case, therefore, if all incomes
from surplus are abolished, prices would be
regulated by wages cost plus depreciation.

Now a difficulty arises. Suppose that there
is no private saving in the socialist economy, but

^ Ono passage (Vol. Ill, pp. SOG-B’’*)) suggesta that Mane did
not take this view and that ho regarded the correct system as ono in
which prices ore proportional to labour cost, excluding depreciation
of equipment. Engels states that this passage wos expanded by
him from a note in the mannscriptl and perhaps some confusion
crept in in the process,

Marx conceives of depreciation as equivalent to wear and tear.
Depreciation duo to the more passage of time is not a social cost,
once the investment has been mode, though it must be taken into
account in planning now investment. Some investment, for instance
the original lay-out of a railway, has a permanent life, and its use
involves no social cost at all, after the initial investment. Capital
of this typo must bo treated, in Marx's system, like land, which adds
to real output without adding to value.

29

AN ESSAY ON MARXIAN ECONOMICS

that mYestment in new capital equipment is
considered desirable* and that free services,
such as educatiqn, are provided to the com-
munity. The outlay on investment and free
services generates purchasing power in excess of
the cost of consumable output. One method of
absorbing this excess is to impose an income tax.
Prices on average would then be equal to costs,
but spendable income would be less than costs.
An alternative method is to impose a purchase
tax, so that prices exceed costs. How should’
this tax be assessed ?• If prices are to correspond
to values^ in Marx’s usual sense, the tax must be
proportional to wages cost. The situation would
then be the same as the situation with an equal
rate of exploitation in’ each industry, the tax,
which provides for investment and free services,
appearing as the socialist equivalent of surplus.
But it would seem much more reasonable (if
there is no relevant difference between the com-
modities on the demand side) to make the tax
equal ad valorem. There is no reason why com-
modities which happen to require a liigh ratio of
labour to capital equipment should make a high
proportional contribution towards investment.
Other methods of assessing the tax might be
preferred, but there seems to be no' advantage
in a system which' makes prices correspond to
values.

^ Under a communist system ** society must calcuJate befomhand
how much labour, means of production, and means of subsistence
it coa utilise without injury lor such lines of ootivity as, for instance,
the building of railroads ” (Vol. H, p.

30

THE LABOUR THEORY OF VALUE

In the foregoing argument it has been tacitly
assumed that each industry works under constant
returns, so that a given proportional increase in
outlay produces an equal proportional increase
in the output of the commodity concerned.
When this condition is not fulfilled the concept
of vdhie raises fresh difficulties. Let us elimin-
ate the other complications by abstracting from
capital, so that wages are the only cost of
production, and. by assuming that no taxation
is necessary to create a fund for investment, and
then let us consider Marx’s example of producing
wheat' under conditions of diminishin g returns
from land.

The problem has two aspects. The first con-
cerns the appropriate intensity of cultivation
of pieces of land which differ m quality. The
maximum product is obtained by a given number
of men employed when the marginal productivity
of labour — the addition to output caused by
employing an additional man- — is equal on each
piece of land. It would be wasteful to employ the
labour in such a way that its average productivity
is equal, unless average and marginal product-
ivities happened to be proportional.

Suppose there are two pieces of land on which
the conditions shown in the table overleaf obtain.
Suppose that 25 men are available. To follow
■the principle of making the value of wheat equal
on alpha and beta land it would he necessary to
allocate 15 men to alpha and 10 to beta. The
total product woiild then be 200, and output per
31

AN ESSAY ON MARXIAN ECONOMICS/

Men Employed

Wljoat reduced

Average Output per JIan

Alpha Lam

i

10

. 100

10

15 .

120

8

BUa Land

10

80

8

16

105

1

mAn would be 8 on each piece of land. But a
total product of 205 could be obtained by the
same men if 15 were allocated to beta and 10 to
alpha. The average ■ product would then be
greater on alpha than on beta, and the two lots
of wheat would differ in value. Once more the
criterion of value fails to give the best results.

The second aspect of the problem concerns
the pricing of the wheat. In Marx’s example,
quoted above, the. marginal cost of a quarter of
Avheat, when’ 10 quarters are produced, is 60
shillings, and the average cost is 24 shillings. It
Avould be possible to sell the Avheat at 24 sliillings
a quarter, and Marx suggests that this is the
correct policy. But it wquld be more reasonable
to argue thus; tliis product yields a surplus,’
above its labour cost, of 360 slnUings, when it is
sold at marginal cost. What is the beat use to
which this surplus can be put ? To subsidise
Avheat prices might be the right answer. But,
even if wheat ought to be subsidised, there is no
particular reason why the best rate of subsidy
should be that which just compensates for the
difference between marginal and average cost.

32

• THE LABOtTR THEORY OE VALUE

A smaller or greater rate of subsidy migbt be
preferable. , And some other commodity or some
different purpose, such as educational services,
might have a stronger claim to be subsidied. It
would be an. unlikely accident that selling the
wheat at its average cost would yield the best
results.

In general, to follow the criterion of value
would lead to avoidable waste and a mal-
distribution of social r^ources between different
uses, and the concept of value has no more
application in the economics of socialism than it
has in the economics of the capitalist system.

CHAPTER 4

THE LONG-PERIOD THEORY
OE EMPLOYMENT

For the most part, Mars conducts his argument
upon the assumption that there is no problem
of the inducement to capitalists to invest in real
capital : “ Accumulate, accumulate ! That is.
Moses and the prophets.” ^ The capitalists are
not particularly interested in enjoying lusurious
expenditure ; ® they are interested in acquiring
more capital, and so long as they have some
profits to invest, thej' can be relied upon to
invest them, irrespective of the prospect of
profit or the rate of interest.® Thus, in the main
argument, the problem of effective demand does
not arise. This problem is treated separately by
Marx, as the problem of “realising surplus value”, .
and his treatment of it is discussed below.®

The problem of unemployment exists, how-
ever, even when the problem of effective demand

^ Vol. I, p. 606t®®>. * Vol. m, p. 285<">.

* At one point Marx speaks of a fall in profits reducing accumula-
tion “ because the stimult^ of gain is blunted ” (Vol, I, p, 633**®^).
But the idea is not followed out, and the rest of the argument is
consistent with tlie fall in accumulation being due merely to tlie
fact that there is leas profit available to ’be invested. *

* See Chapter 6.

34

THE LONG-PERIOD THEORY OF EMPLOYMENT

is ruled out. The amount of employment, at any
moment, depends upon the amount of capital
in existence and the technique of production.
As time goes by, capital accumulates' and the
amount of employment tends to increase. Avail-
able labour also increases, with the natural
increase of population and udth the advance of
capitalism into fresh spheres, which pours into
the labour market a stream of peasants and
artisans deprived of their means of livelihood.
There is normally a fringe of unemployed workers
— the reserve army of labour ^ — and the limit
to output is set by full capacity of capital equip-
ment, not by full employment of labour.

In these circumstances, the level of real
Avages is determined by the bargaining power of
capitalists as a class and workers as a class. So
long as ihe workers do not combine they are
helpless, and must take what they can get.®
Wages therefore tend to be depressed to the
lower limit set by subsistence level.®

* Vol. I, p. 643 a » Vol. I, p.

3 Marx’s first formulation of the theory of wages is purely dog*
matfc. Labour*power, like other commodities, tends to be sold at
its value, and the value of labour-power is the labour-time necessary
to produce the means of subsistence of the workers, end of the
children who wiU replace them (Vbl. I, pp. 14D-62^^1}. This subsistence
level contains a historical and moral element ”, since it partly
depends upon the habits and degree of comfort in which the class
of free labourers hoa been formed ”, that is, upon the standard of
life obtaining before capitalism di^ossesses the peasants and turns
them into free labourers This treatment of the determination
of wages, like the dogmatic treatment of prices, is gradually aban-
doned as the argument develops. The value of labour (subsistence
wages] does not determine the level of wages, but merely describes
the limit below which wages cannot lie for long without reducing

35

AN ESSAY ON MARXIAN ECONOMICS

Even when wages are at rock-bottom the
capitalists still endeavour to squeeze more profit
out of the workers, by lengthening the working
day.i screwing up the intensity of work,= and
drawing women and children into industry.
There is a lower ‘limit, set by starvation level, to
the real earnings of a family, but the amount of
work which the family is forced to do to earn
those wages can be increased by these devices.®

This process of extravagant exploitation leads
to a reaction. ■ The health of the workers is
. undermined and the supply of future generations
threatened. Enlightened self-interest then com-
pels the capitalists to submit, though reluctantly,
to labour legislation, which curbs their own
excessive greed. Faotory'Acts limit the working
day and improve conditions of labour, and wages
are prevented from falling below Subsistence
level.®

The helpless situation of the workers is due
to the industrial reserve army. So long as there
is unemployment their bargaining power is
chronically weak. The accumulation of capital,
however, is going on all the time, and at some

the labour-power of the workera and bo threotOTing to destroy the
basis of exploitation^

' Marx’s reference to a “ historic^ and moral ” element in the de^r-
mination of subsistence wages is often interpreted to mesn that the
vahxt of labour tends to rise, as capitalism develops* with the
customary standard of life. I find no warrant for this inteipretatioii*
And, if it were adopted, it would reduce Marx’s argument to circu-
larity, for it would mean that the level of real wages detennines
the value of labour-power.

1 VoL I, p. ‘ ’Yol. I,.p. 407<«",

3 Vol. I, p. 392<">. '* Yol. I, p.

36

THE LONG-PEBIOD THEORY OF EMPLOYMENT

periods the stock of capital, which governs the
amount of employment offered, catches up upon
the supply of labom. Their bargaining position
is then strong and real wages tend to rise.
Profits consequently fall, and the rate of accumu- .
lation is slowed up relatively to the growth of
population, so that the reserve army grows again.^ •
Meanwhile, the capitalist system, which cannot
tolerate low profits, reacts by adopting new
techniques which economise labour.® Under the
stimulus of high wages labour-saving inventions
are made, so that a given amount of capital
henceforth offers less emploj^ment. The reserve
army of labour is thus further recruited by
technological unemployment. Moreover, there is
a fresh motive for extending capitalism into new
spheres, and finding new labour to exploit. Tire
temporary- bargaining strength of the workers is
destroyed by these means, and real wages faU
again.®

• Thus over the long run wages are regulated
by the expansion and contraction of the reserve
army.* The situation which Marx considers most
favourable to a rise in wages is an increase in the
stock of capital without any change in technical
methods or in the ratio of capital to labour.
Employment per unit of capital is then constant,
and as capital expands employment increases

> Vol. I, p. eaiP"). ' Vol. I, p. 643(«\

* Mars regards the fall and rise m the reserve army of labour as
being of the same nature as the trade cycle (Vol. I, p. 6471’®!) ; this
point is discussed below, p. 102.

‘ Vol. I, p. 661<">.

37

AN ESSAY ON MARXIAN ECONOMCS

and nnemployment falls, so that the scales are
gradually tipped in favour of labour.* Increas-
ing productivity of labour he does not regard as
favourable to rising wages. It is associated with
increasing capital per man, so that a given
amount of capital offers a falling amount of
emplojnnent.® Moreover, growing mechanisa-
tion of industiy destroys the demand for slHIl,
and reduces the worker to a mere fragment of a
man,® so that the lower limit to wages is depressed
to a pure subsistence level, including no margin
for education.^

In one passage Marx admits that a rise in
productivity may raise real wages so that the ,
workers obtain some share in the achievements
of technical progress,® but it seems clear that the
argument of Capital did not lead him to expect
any appreciable upward trend in the level of
real wages under capitalism, wliile the Com-
munist Manifesto presets an actual decline in
wages with the development of labour-saving
technique.

By and large, events have not fulfilled this .
prediction, and Marx’s argument requires ihodi-
fication if it is to be brought into line with the
rise in real wages which has actually occurred in
modem times. Ma;rx’s contention is that the
mechanism of the reserve army of labour keeps
wages within limits which permit the continu-

» Voi. I, p. 631 "O. * Vol. I, p.- 660<»1.

> Vol. I, p. 494<”>. • * P- 3C2””-

» Vol.I,p. 632W>,

38

THE LOKG-PERIOD THEORY OF EJIPLOY^KT

ance.of the capitalist system. An increase in
productivity raises the upper limit to wages
tolerable to capitalism. The development of
trade-union power tends to push wages towards
that upper limit, while the counteracting force of
monopoly prevents them from rising above it.^
At the same time the incentive to the capitalists
to react to a rise in real wages by introducing
labour-saving techniques becomes progressively
weaker as the proportion of wages cost to capital
cost falls.

This modification of Marx’s argument impairs
the austere simpheity of the original formulation,
but it does not affect its moral. It is relevant,
for practical purposes, to compare the average
standard of hfe at the present time, not with
what it was in 1848, or with what it was in the
stone age, but with what it might be now imder
a more rational economic system.® It is the
relative, not the absolute, share of laboiu: in total
output that is important.

Marx’s theory of wages brings into a clear
light many points which are often neglected in
academic economics. But, as soon as the rigid

^ Marx’s Bcheme tbe growth of population provides another
counteracting force, ^ce it demands a certain rate of capital
accumulation if unemploj^ent is to be kept wi^n hounds.

2 Those modem Marxists who seek to deny that any rise in real
wages has occurred, or to explain it away as solely due to the expIoitB'
tion of colonial peoples, play into the hands of the conservative
trade-union leaders, who look back to their own ragged and bare-
foot childhood and count up tbe blessings which capitalism has
brought to the workers. It is unnecessary to meet such arguments
upon their own ground, since it is easier to cut the ground from under
their feet.

39

D

AN ESSAY ON SIARXIAN ECONOmcS

subsistence-level tlieorj^ is abandoned, it pro-
vides no definite answer to the central question
— what determines the division of the total
product between capital and labour ? The rate
of exploitation, the division of the worldng day
between paid and unpaid time, the division of
real output into wage-goods and other goods — r
these are all merely alternative ways of formu-
lating the problem of distribution. None pro- •
vides any clue to finding the answer.

The rate of profit on capital is simply an
average sliare in the total of profits which the
system as a whole is producing. The rate of real
wages moves, unth the varying fortunes of the
class struggle, between a lower limit vaguely
defined in terms of the subsistence level and an
upper limit which is not defined at all. The rate
of exploitation, at any moment, is determined by
the difference betweefa real wages and total out-
put. But, apart from a general presumption
that the rate of exploitation^will increase ■with
increasing produotmty of labom, there is no law
which governs its movement. The academic
theory, as we shall see in a moment, is in no
better case. If there is any^w governing the
distribution of income betweejf\ classes, it stiff
remains to be discovered. . \

40

CHAPTER 5

THE EALLING RATE OF PROFIT

.It -was a generally accepted tenet in the orthodox
economics of Marx’s day that there is a long-run
tendencj' for the rate of profit on capital to fall.
Marx accepted this view and set himself to
account for the phenomenon of falling profits.
His explanation does not turn upon the difficulty
of realising surplus value — the problem, as we
now say, of a deficiency of effective demand —
hut is intended to he valid even when that
problem does not arise.

CHu based his explanation upon the rising
organic composition of capital.^ Capital accumu-
lation and technical progress do not necessarily
involve an increase in capital per man employed.
Inventions may, on balance, reduce capital cost
per unit of output as much as labour cost, for
they may improve the efficiency of lahou^ in
maldngmachines as much as in worldng machines.
Tliis possihihty Marx allows for. He shows how
“cheapening the elements of constant capital ”
offsets the tendency of the organic composition
of capital to rise.“ (Teclmical progress may also

^ See above, p. 8. * Vol, HI, p, 276*^**.

41

AX ESSAY OX 3L4BXLAX ECOXOJHCS

reduce the period of turnover of capital good^
Chemical processes such as bleaching are speeded
up, and the development of transport economises
the stocks vhich it is necessary to hold at each
stage of production and marketmg.’(^This tends to
reduce capital per man'emploj’^ed. Ifevertheless,
ilarx takes the view that there is on balance a
strong tendency for capital per man to increase
as time goes by, and this assumption is a natural
one to make./

vilarx’s law of the falling tendency of profits
then consists simply in the tautolog}^ : when the
rate of exploitation is constant, the rate of profit
falls as capital per man increases. Assuming
constant periods of turnover, so that c-s-n

measures the stock of capital : ' when - is con-
stant and - is rising, is falling.®

This proposition stands out in startling con-
tradiction to the rest of Marx’s argument. For
if the rate of exploitation tends to be constant,
real wages tend to rise as productivity increases.
Labour receives a constant proportion of an
increasing total. Marx can only demonstrate &
falling tendency in profits by abandoning his
argiunent that real wages tend to be constant.
This drastic inconsistency he seems to have over-

1 Eiigels makes these points in n chapter which he supplied to
fill a gap in the manuscript for Volume HI (chap. 4 , “ The Effect
of ffae Tum-oTcr on the Rate of Profit

® See ohore, p- 9.

3 Vol. m, p. 247««.

42

THE FALLING BATE OF PROFIT

looked, for when he is discussing the falling
tendency of profits he makes no reference to the
rising tendency of real wages which it entails.

Orthodox economic theory also contains a
law of falling profits. In a given state of know-
ledge, according to the orthodox argument, out-
put per man rises less than in proportion to capital
per man, as capital increases, since a given
amount of capital will always be used in the most
efficient way that the ruling technique permits,
so that additions to capital must be pressed into
successively less and less productive uses. Thus
the marginal productivity of capital — the addi-
tion to output due to a unit increase in the stock
of capital — falls as capital increases relatively
to laboim employed. In the orthodox theory
the rate of profit is governed by the marginal
productivity of capital, and the rate of profit
falls as capital per man increases. But in the
orthodox system, competition among employers
ensures that real wages are equated to the mar-
ginal productivity of labour, and the marginal
productivity of labour rises as capital per man
increases. Thus a falling tendency in profits
entails a rising tendency in wages. For the
orthodox economists this presents no difficulty,
but for Marx it is a stumbling-block.

What happens to the rate of profit if real
wages remain constant ? With constant real
wages, the rate of profit rises or falls, as capital
per man increases, according as the ratio of the
proportionate increase in product to the propor-
43

AN ESSAY ON JIABXIAN ECONOJUCS

tionate increase in capital exceeds or falls short
of the ratio of profits to product. Suppose that
the net product is 100 and that profits and wages
in the first instance are each equal to 50 so that
the ratio of profit to product is Suppose that
an increase of capital per man from 100 to 110
leads to an increase in net product from 100 to
108. Then wages remain equal to 60 and profits
rise to 58. Thus a 10 per cent increase in the
stock of capital leads to a 16 per cent, increase
in the total of profits, and the -rate of profit on
capital rises. If the product rose to only 105,
when capital per man. increased to 110, the rate
of profit on capital would be constant. With
any lower ratio of increment of product to incre-
ment of capital the rate of profit would fall.

An attempt might be made, on this basis, to
rescue Marx from his inconsistency by arguing
that, in a given state of knowledge, the marginal
productivity of capital must be assumed to fall
very sharply beyond a certain point. On that
assumption, accumulation will lead sooner or
later to a falling rate of profit, even when real
wages are constant. But it is very unnatural to
assume given knowledge in a dynarpic system,
and, certainly, that assumption is alien to Marx’s
method, fOTr in bis scheme, an increase in the
ratio of capital to labour can only occur as a
result of what, in the academic scheme, would be
regarded as a change in . techmcal knowledge.^
If knowledge ' develops .as capital accumulates,

* Sfee above, p. 10.

^ 44

THE FALLING BATE OF PROFIT

there need be no tendency to diminishing returns,
and uath constant returns there can he no
tendency for the rate of profit to fall (always
assuming that the problem of effective demand
is ruled out). The most that we can say is that
periods of falling profits may occur when capi^tal
per man increases very rapidly relatively to the
rate of advance in technical knowledge. In
Marx’s view, however, technical knowledge is
not an independent factor, and when accumula-
tion is rapid a strong stimulus is applied to
labour-saving invention.

Moreover, the whole apparatus of the theoiy
of mkie is designed to exclude the notion of
attributing productivity to capital, and allows
no room for the concept of the marginal pro-
ductivity of a particular factor. A theory of
falling profits based on the falling marginal pro-
ductivity of capital would he something quite
different from Marx’s theory.

Marx’s theoij^ as we have seen, rests on the
assumption of. a constant rate of exploitation.
Certain causes which may lead to a rise in the
rate of exploitation he treats as offsetting
tendencies..^ Hours of work may he lengthened
(with a constant daily wage) and the intensity
of work may be increased, for instance by
speeding up machines.® Real wages may he
reduced,® or an increasing amount of labour
may be employed in direct services, where both

» Vol. in, chap. * Loe. cU. p. 273<«'.

=> Lob. Bit. p. 270<“).

45

AKT ESSAY ON MARXIAN ECONOMICS

capital per man and real wages are abnormally
low.i To these tendencies, which all help to raise
the rate of exploitation, there are obvious limits,
and Marx argues that they cannot be sufficiently
strong to offset the falling tendency of the rate
of profit. This may be readily admitted. But
the rise in the rate of exploitation which comes
about through a "rise in productivity, with con-
stant hours and intensity of work, and constant
real wages, is not limited in ' the same , way.
Productivity may rise without limit, and, if
real wages are constant, the rate of ^exploitation
rises with it, Marx appears to have been in some
confusion. upon this point, for when he.begins to
discuss the effect of a rise, in productivity on
the rate of exploitation, he switches over in the
, middle of the argument to discussing the effect
of changing the length of the Avorking day.” .

The trouble probably arose, like most of the
obscurities in Marx’s argument, from his method
of reckonmg in terms of value. With given.

^ Jjoc, dU pp, 277-8***\ My analysis of "Disguised TJnemploy-
ment” {Essays in Iht Theory of £mpfoi/ff»eM^)bearB&olo8e resemblance
to this argument.

2 Vol. m, p. 280^»>: “ To the extent that the development of
the productive power reduces the paid portion of the employed
labour, it raises the B\irpluB-va!ue by raising its rate ; but to the
extent that it reduces the total mass of labour employed by a certain
capital, it reduces the factor of numbers with which the rate of
Buiplus-value is multiplied in'ordw to calculate its nonsa. Two
labourers, each working 12 hours daily, cannot produce the same
mass of surplus-value as 24 labourers each working oiity 2 hours,
even if they could live on air and did not have to work for them-
sel^s at all. - In this reject, then,' the compensation of the reduction
in the number of laboi^ra by means of an intensification of exploita-
tion has certain impassable limits. It may, for this reason, check
the fall of the rate of profit^ but cannot prevent it entirely,"

46

THE FALLING BATE OF PKOFIT

labour-time, of given intensity, the rate of mine,
created is constant. Thus v + s is constant. It

might seem-, at the first glance, that ^ ean rise

only if wages fall. But this is an illusion. An
increase hi productmty reduces the value of

commodities, and the value of labour-power, with
constant real wages. Thus v falls towards zero,

and - rises towards infinity, and aU the time real

wages are constant. Alternatively, it might be
argued that Marx was unconsciously assuming
that increasing productivity does not affect the
wage -good industries, so- that constant real
wages are compatible with a constant rate of
exploitation. But, however we interpret it,
Marx’s argument fails to establish a presumption
that the rate of profit tends to fall, when the
problem of effective demand is left out of account.

His argument leads him to suppose that a
. situation might arise in which the total of profits
remains constant, while capital continues to
accumulate. This he describes as an absolute
over-production of capital.^ If the total of
profits is constant, jiew capital can obtain a
share only at the expense of old capital. Cut-
throat competition between capitalists sets in,
and part of the capital is forced to “ lie fallow
Mr. Kalecki’s analysis of the top of a boom®
bears a certain resemblance to this picture. In

1 Vol. m, pp. 294-300(“>. ' L<w. P- 295.

* Essays in ths Theory of Economic Fluetuaiions, p. 140.

47

AN ESSAY ON MABXIAN ECONOMICS

Mr. Kalecki’s model of the trade cycle the total
of profits is a function of the rate of investmeat.
At the turning point of the cycle, the rate of
investment is constant from one period to the
next. The total of profits is therefore constant.
.Bnt the stock of capital is increasing. The rate
of profit is therefore falling, and it is this fall
in the rate of profit which pulls the system down
mto the slump. In Marx’s scheme there is per-
fect competition, so that part of the capital is
used to capacity and part hes idle. In llr.
Kalecki’s scheme there is imperfect competition,
and the constant total of profit is spread over
an increasing amount of capital by a general
decline in the utilisation of capital.^ Apart from .
this minor difierence, the two arguments appear
very similar. . .

]But' the resemblance is superficial, for in
Mr. Kalecki’s scheme it is the level of effective
demand which regulates the total of profits,
while in Marx’s scheme the total of profits is
unable to increase for some other reason, and,
as we have seen, Marx fails to make out his case
that the total of profits is limited, apart from
effective demand.

It may seem idle to object to Marx’s argu-
ment, based on a constant rate of exploitation,
while at the same time maintaining that the
assumption bf constant real wages is unrealistic,
if the rate ok exploitation were in fact constant,
and if Marx! was right in supposing that tech-

1 See below, p. 89.

iS

THE PALLING BATE OP PEOPIT
nical progress tends to increase capital per man,
it might appear that his formula — when ^ is
c s

constant and - rising, is falling — would after

V ^ c+v

all embody an important truth. But the appear-

ance is deceptive. For - does not depend solely

upon technical conditions, but also upon employ-
ment per unit of capital equipment. It may
be true that capital per unit of capacity tends
to increase, but output per unit of capacity is
highly variable. And it varies, not only between
boom and slump, but also over the long run.
There are always booms and slumps, but in
some periods slumps are deeper and longer than
in others, so that the average utilisation of
capital, good years with bad, tends to be less
in some periods than in others. And, with
given equipment, the lower is utilisation, the

greater is -. Thus Marx’s formula merely

shows that, given profits tend to rise or fall

with the state of trade. There needs no ghost
come from the grave to tell us this.

Tri short, it seems that Marx started ofi on a
false scent when he supposed that it was possible
to find a law of profits without taking account
of the problem of effective demand, and that his
explanation of the falling tendency of profits
explains nothing at all.

49

CHAPTER 6

EFFECTIVE DEMAm> -

So far Tve liave been discussing tliose parts of
Marx’s argument wMch ignore the problem .of
effective demand- — wbicb treat, as be puts it,
of the production of surplus value, as opposed
to the realisation of surplus value. But he also
provides the elements of a theory of effective
demand, and lays the basis for a study of the
law of motion of capitaUsm quite different from
the law of the falling tendency of profits.

Orthodox economics used to eliminate the
problem of effective demand, and justify the
assumption of fuU employment, by appealing to
Say’s Law. This so-called law consists in the
■ statement that supply creates its own demand,
so that an increase in output always generates a
sufficient increase in expenditure, to clear the
market of the commodities produced. This pro-
position is re-stated in a more sopliisticated
form by Marshall when he writes, “ The whole
of a man’s income is expended in the purchase
of services and of commodities. ... It is a
familiar economic axiom that a man purchases
labour and commodities with that portion of
60

EFFECTIVE DESIAND

his income which he saves just as much as he
does uith that which he is said to spend.” * If
this \riew were correct there could be no problem
of a deficiency of money demand for any output
that could be produced. Until the orthodox
axiom was . challenged by Sir. Ke3mes’s theory
of emploj’^ment, it was not questioned by the
academic economists. Indeed, it provided the
principal shibboleth which divided the orthodox
from heretical theorists such as Hobson and
Gesell.

Slarx was not deceived bj' it, “Nothing
could be more childish than the dogma, that
because eveiy sale is a purchase, and every
purchase a sale, therefore the circulation of com-
modities necessarily implies an equilibrium of
sales and purchases. ... No one can sell unless
someone else purchases. But no one is forth-
with bound to purchase, because he has just
sold. ... If the split between the sale and the
purchase become too pronounced, the intimate
connection between them, their oneness, asserts
itself by producing — a crisis.” “

To anatyse tliis problem Marx devised a
simple and penetrating argument. He divides
total output into two groups — capital goods
and consumption goods.® The output of group
I, the capital - good industries, consists of
Cl +Vi +Si, and the output of group II, the
consumption - good industries, consists of

* Pure Theory of Domestic Valucsi p. 34.

* Vol. I, p. * Vol. H, p. 457*“»,

an essay on MARXIAN, economics

Cs +Vn +Sj. The method can be refined to any
extent — for h^tance ^oup I can be subdivided,
into raw materials and equipment, and group 11
into wage goods, mabdy consumed by workers
and partly by capitaUsts,- and luxury goods con-
sumed onl3r by capitalists. But for the mam
argument a division into two groups is sufiSicient.

To simplify the analysis klarx confines it m the
first instance to a system in which there is no

net investment, so that the whole of output is
devoted to current consumption and replacement
of pre-existing capital as it wears out. The whole
capitalists’ net income, as well as wage-income,
is then devoted to consumption. Marx regards

this assumption as a drastic abstraction from

reality, for in reality the main purpose of the
capitalists is to apply current surplus to the

acquisition of new capital. The assumption is

made solely for purposes of exposition.^ -

In a system with zero net investment —
simple reproduction in Marx’s phrase — the
whole output of group I consists of replacement
of capital. Thus Cj + + Sj = Ci + Cj. Therefore

Ui + Si = C2. Tlie output of group 11 is equal to
wages pltis capitalists’ income. Thus C2+U2+S2
= (vi+Si) + (vi+Si). Again it follows that
Ui + Si = Cj. The net output of group I is balanced
by the replacement of capital in group II.*.

The first problem which Marx solves by this
argument is the apparent paradox that total out-
lay must be equal to total incomes, while in any

1 Vol. n, p. 466'*u. • VoL n, p. 466<’">.-

52

JIFFECXiyE DEMAND

one industry receipts exceed income-payments
by the depreciation of capital* This is the
problem which has caused Major Douglas so.
much anxiety. Marx shows how the pay-
ments which represent depreciation from the
point of view of group TI appear as income for
group I.

Next, he shows how even a S3'stem of simple
reproduction (with zero net investment) is not
free from the danger of disequilibrium. The
value of c partly consists of amortisation funds
attached to long-lived equipment, and these are
generally allowed to accumulate over a period
of years and are then expended in a single burst
when the equipment requires to be renewed.
If the age-composition of the stock of equipment
is such that renewals are- required at a steady
rate, equilibrium is not disturbed. If, however,
the ages of the macliines are not spread evenly,
outlay on renewals in some years will exceed, and
in some years fall short of the amortisation
funds, and equilibrium will be ruptured. When
renewals are in excess, Wi + Si - exceeds c^; the
increase in Vi in turn increases Vt + Sj and boom
conditions develop. When amortisation funds
exceed renewals there is a slump.® , “ Unless a
constant proportion between expiring (and about
to be renewed) fixed capital and still-continuing
(merely transferring the value of its depreciation
to its product) fixed capital is assumed . . . the

* Vol. n, p. 473^*^^ Soo alflo Marx Angela Correspondence, lefctex
No. 07. - Vol n, pp. 543.7<»8>.

AN ESSAY ON MAEXIAN ECONOMICS

mass of circulating elements [raw materials] to
be reproduced in one case would remain tbe
same wlule the mass of fixed elements to be
reproduced would have increased. Therefore the
aggregate production of I would have to increase,
or, there would be a deficit in the reproduction,
even aside from mpney matters.

“ In the other case . . . there would be
either a decrease of the aggregate production of
I, or a surplus (the same as previouslj' a deficit)
which could not be converted. into money. . . .
I must contract its production, which implies a
crisis for its labourers and capitalists, or produce
a surplus, which implies, another crisis. Such a
surplus is not an evil in itself, but.it is an evil
under the capitalist system of production.” ^
Marx suggests that the fact that the trade
cycle has a period of ten ji-ears may indicate that
the average length of life of plant is ten years.”
This view (which he throws out merety as a
passing hint) cannot be established, for the
differences in the length of life of various types
of plant must damp down the cycle of renewals,
while, variations in net investment swamp it
altogether, but the idea is interesting -since it
shows that Marx was on the track of the idea
that variations in investment are the key to the
trade cycle.”

. He shows how investment generates boom
conditions. “Since elements of productive

» Vol. n, p. 646-6(”). YoL n, p. 2110*1

’ Cf. Bobertson, A Study oj Industrial Jhuctuatidns, p. 36. .

54

EFFECTIVE DEJIAND

capital are continually •withdrawn from the
market and only an equivalent in money is
thrown on the market in tlieir place, the demand
, of cash payers for. products increases without
supplying any elements for pmchase. Hence a
-rise in prices, of means of production and of
subsistence. To make matters worse, s^vindling
operations are always carried on at this time,
involving a transfer of great capitals, A band
of speculators, contractors, engineers, la^vyers,
etc., enrich themselves. They create a strong
demand for consumption on the market, wages
rising at the same time. . . In those lines of
business in which production may be rapidly
increased, such as manufacture proper, mining,
etc., the rise in prices causes a sudden expan-
sion, which is soon followed by a collapse. The.
same effect is produced in the labour-market,
where large numbers of the latent relative over-
population [the reserve army], and even of
employed labourers, are attracted towards the
new linos of business,’* *

Marx emphatically rejects the notion that the ■
cycle is a merely monetary phenomenon : “ That
which appears as a crisis on the money market,
is in reality an expression of abnormal conditions
in the process of production and reproduction
Two further suggestions of great interest are
made in- the course of the argument. First, that
boom conditions in the home country lead to
an excess of imports over exports, while a

1 Vol. U, p. 302<“>. * Voi; II, p. SOS'"*.

55

AN ESSAY ON MANXIAN ECOYOSUCS

deficiency of home investment may he balanced
by a surplus of erports;^ second, that gold
mining, which generates “purchases without
sales ”, has an effect upon activity sinular -to
investment.*

Unfortunately, Marx did not complete the
manuscripts which deal with net investment
(reproduction on an enlarged scale) * and this
part of the work degenerates into a mere jumble
of notes. The main idea, however, is clear
enough. Part of the surplus of both group I
and group H is saved, that is, not expended on
the products of group II (consumption goods) ;
Vi + Si then exceeds c,, and must be matched by
an equivalent outlay on new capital goods out
of Ss. Saving repres'ents sales without purchases,
and .can proceed smoothly only if it is ofeet
b 5 ' equivalent investment — pmnhases without
sales. ■ Such a balance is possible, as he shows in
a series of numerical examples, but “ a balance
is' an accident under the crude conditions of
[capitalist] production”.* The cause ojE crises
is to be sought in a lack of balance, which is
an ever-present threat to the stability of the
sj'^stem. Iilara does not develop a full theory
of the trade cycle, or of the long-run movement
of capitalism, but he points the direction in
which a theory can be foimd. '

1 VoL n, p. 362'*U and p. 546<“).

* VoL n, p. 549»*>.

» VoL H, chap. 21, " Acoomulation and Keproduction on an
EnlaiBod Scale See Engels’ Pieftce, Vol. n, p. 11.

* Vol. H, p.-S78»“>.

EFFECTIVE DEMAND

He rejected the crude under-consumption
theory current in Ms da3r,^ but his own analysis
clearly leads to the view that maldistribution
of consummg power is the root of the trouble.
Engels found the following note, inserted for
future elaboration, in the passage (referred to
above) rvhich describes an investment boom :
“ Contradiction in the capitahst mode of produc-
tion : the labourers as buyers of commodities are
important for the market. But as sellers of
then* own commodity — ^labour-power — capitalist
society tends to depress them to the lowest
price. Eurther contradiction : The epochs in
Avhich capitalist production exerts aU its forces
are alwa5's periods of overproduction, because
the forces of production can never be utilised
to such a degree that more value is not only
produced but also realised ; but the sale of com-
modities, the realisation on the commodity-
capital, and thus on the surplus value, is limited,
not b}"^ the consumptive demand of society in
general, but by the consumptive demand of a
society in which the majority are poor and must
always remain poor.” ®

This note, combined with the equations of
reproduction, suggests that Marx intended to
work out a theory on some such lines as this :
consumption by the workers is hmited by their
poverty, wMle consumption by the. capitalists is
limited by the greed for capital wliich causes
them to accumulate wealth rather than to enjoy

» Vol. 11, p. 47C 0“>. “ Vol. 11, p. 363<‘“).

57

AN ESSAY ON MAKXIAN ECONOMICS

luxury. The demand for consumption goods
(the product of group 11) is thus restricted. But
if the output of the consumption-good industries
is Umited by the market, the demand for capital
goods (group I) is in turn restricted, for the
constant capital of the consumption-good .in-
dustries will not expand fast enough to absorb
the potential output of the capital-good in-
dustries. ■ Thus the distribution' of income,
between wages and surplus, is such as to set up
a chronic tendency for a lack of balance' between
the two groups of industries.

Some hints of this line of thought are to be
found in Volume III. “ The conditions of direct
exploitation and those of the realising of surplus-
value are not identical They are separated'
logically as weU as bj’’ time and space. The first
are only limited by the productive power of
society, .the last by the proportional relations of
the various lines of production and the con-
. suming power of society.- This last-named power
is not determined either by the absolute product-
ive power nor by the absolute consuming power,
but by the consuming power based on antagon-
istic conditions of distribution, which reduce the
consumption of the great mass of the population
to a variable minimum -within more or less
narrow limits. The consuming power is further-
more restricted by the tendency to accumulation,
the greed for an expansion of capital. . . .To'
the extent that the productive power develops,
it finds itself at variance with the narrow basis
58

EFPECrnrE DEMAND

on -which the conditions of consumption rest.” *
■“ The last cause of all real crises always remains
the poverty and restricted consumption of the
masses as compared to the tendency of capitalist
production to develop the productive forces in
such a -way, that only the absolute power.of con-
smnption of the entire society would be their
limit.” ® ■

To work out a theory on these lines it is
necessary to deal -with the problem of the induce-
ment to invest. If capitalists were always pre-
pared to invest their surplus in capital goods,
■without regard to the prospect of profit, the out-
put of capital goods would fill the gap between
consumption and maximum potential output.
The balance between the two groups of industries
would he self-adjusting, and crises would not
occur, however -wretched the level of consump-
tion. (Though fluctuations in the reserve army
of labour, owing to the interplay of capital
accumulation and technical progress, would not
be eliminated.) Thus to clinch the argument it is
necessary to show that investment depends upon
the rate of profit, and that the rate of profit
depends, ■ in the last resort, upon consuming
power. It is necessary, in short, to- supply a
theory of the rate of profit based on the principle
of effective demand.

This Mars fails to do, for he had meanwhile
worked out his theory of the falling tendency of
profit, based on the principle of the rising organic

1 Voi. nr, pp. 286.7<*“>. * Voi. nr, p. 56so”>.

59

■ AK ESSAY ON SIAUXIAN ECONOMCS

composition of capital. In Voiiune HI this
theorj’^ is inestricahly mixed up mth the under-
consumption theory, and the tvro lines of thought
are not brought into any clear relation uith
each other. The theory of the falling rate of
profit is a red herring across the trail, and pre-
vented Marx from running the theory of effective
demand to earth.

Marx evidently failed to realise hov much the '
orthodox theoi^'^ stands and fafis with Say’s
Law, and set himself the task of discovering a
theory of crises which would apply to a world in
which Saji’s Law was fulfilled, as well as the
theory which arises when Say’s Law is exploded.
This dualism implants confusion in Marx’s own
argument, and, still more, in the arguments of
his successors.

60

CHAPTER 7

THE ORTHODOX THEORY OF PROFIT

The most striking difference between Marx and
the ortkodox economists appears in tlie con-
ception of surplus. To Marx, depreciation and
wages are the onlj’’ necessarj’^ costs of production,
and rent, interest and profit are all subdivisions
of surplus. In the orthodox S3’^stem, rent of
land is a surplus, because land is a “free gift
of nature ”, and would exist just as much if
no payment were made for it, but interest
and profits are the necessarj’^ supply price for
capital, without wliich it would not be forth-
coming. ' Wages, interest and profit are grouped
together as “ the reward of human efforts and
sacrifices”. Thus attention is distracted from
the distinction between income from work and
income from property, and a moral justification
is provided for interest and profit.

In order to build up a theory based on the
notion of the supply price of capital, academic
economics developed a highly artificial method
of analysis. All relevant conditions except the
stock of capital — consumers’ demands, the
supply of labour and of natural resources and
61

AN ESSAY ON MARXIAN BCONOmcS

Imowledge of technical methods of production

— are taken as given, and the stock of capital
is conceived to adjust itself in such a way as to
establish equilibrium with the given conations.

The rate of profit earned by a given stock of
capital is governed by ifes marginal productivity

— the addition to output caused by making a
small unit addition to capital. Any given stock
of capital is conceived to be used in the most
eflScient manner that existing Imowledge permits.
It follows from this, as we have seen,^ that an
increase in capital, relatively to other factors
of production, leads to. a fall in its marginal
productivity. The rate of profit thus depends
upon the relative scarcity of capital, and falls
as the stock of capital increases.

In Marx’s system the stock of capital in
existence at any moment determines the amount-
of labour employed. In the orthodox system
full employment of the available labour is
acliieved, in equilibrium, whatever the stock of
capital. There are a number of alternative
ways of producing a given output, with different
combinations of factors,^ even when the state of
knowledge is assumed constant, and producers
are conceived to substitute one factor for another
in response to changes in their relative prices,
so that a given output is always produced at
TtiiTiiTmiTn cost, while consumers substitute one
commodity for another, so that the maximum
satisfaction is obtained from a given outlay.

» Sea p. 43.

62

THE ORTHODOX THEORY OF PROFIT '

Thus a change in relative factor prices alters
both the combination of factors used in pro-
ducing a given commodily and the . relative
outputs of commodities requiring different com-
binations of factors. The relative prices of the
factors of production are conceived to settle, in
equihbrium, at the level at which all are fully
employed.

The principle of ’ substitution plays an im-
portant, perhaps an exaggerated, part in aca-
demic economics, and it was one of the main
refinements of analytical technique introduced
by the generation which succeeded Marx. By
him it is completely neglected. He assumes
that, with given technical knowledge, there is
only one possible combination of laboiu" with
capital in each industry, and he pays no atten-
tion to substitution by consumers.

This makes his analysis appear somewhat
primitive. On the other hand, he does pay atten-
tion to the reaction of changes in the supplies
of factors on technical knowledge itself. And
technological imemployment — the reserve army
of Jaboiu: — is one of the central mecham'sms,
in his system, which regulates the relative
earnings of the factors of production. The
orthodox system treats a change in technical
knowledge as an arbitrary shift in the position
of equilibrium. Unemployment, certainly, may
result from the change ; but it is regarded as
temporary, and attention is concentrated upon
the position of equilibrium appropriate to the
63

AN ESSAY ON ilANXIAN ECONOMICS

now teclinique of production’, in which labour
wiU once more be full}^ employed. Thus in the
orthodox scheme technological unemployment
appears hazily at the fringe of a field of vision
focused on the point of equilibrium, while Marx
focuses upon the industrial reserve army, and
.leaves the principle of substitution in the haze.

These divergences, however, are of minor
importance compared to the complete difference
of outlook between Marx ■ and the orthodox
economists on the question of the supply of
capital.

To Marx, the desire to own capital does not
have to be explained, and, so long as any profit at
aU is obtainable, the capitahsts not only preserve
what wealth they have, but accumulate, accumu-
late. In the orthodox system, owners of wealth
“ discount the future ”, so that if the return on
capital falls below a certain level, they feel that
it is not worth while to continue to own it, and
devour it in present expenditure. Thus the rate
of interest is the reward of waiting — the reward
of not consuming one’s capital,^ while the excess

^ "Waiting, \rhic}i means owning capital, is sometimes confused
with saving, w’hich means acquiring capital by refraining from con*
Burning current income* In the first edition of Marsliall’s Prinotj^cs
^there is no confusion j ** That surplus benefit which a person gets
in the long run by postponing enjoyment, and which is measured '
by the rate of interest (subject as we have seen to certain conditions),

. is the reward of waiting* He may have obtained the dejacto possession
of property by inheritance or by any other means, moral or immoral,
legal or illegal. But if, having the power to consume that property
in iimnediate gratifications, lie chooses to put it in such a form as to
afford him deferred gratifications, then any superiority there may
be in deferred gratifications over those immediate ones is the reward
of his waiting. When he lends out the wealth on a secure loan the

u

THE OKTHODOX THEORY OF PROFIT

of profit (net of depreciation) over the interest
on a secure loan is the reward of nsk-ieanng.
These together make up the supply price of
capital, and the stock of capital is in equilibrium,
tending neither to increase nor dimmish, when
the rate of profit is equal to the supply price of
the existing stock of capital.

Marx’s analysis is too simple, but the orthodox
theory is too far-fetched. The notion of “ dis-
counting the future ” is not based upon direct
observation, but arises from the desire to repre-
sent owning wealth as a “ sacrifice ”. It is
logically self-consistent, but has little bearing on
reality. A full theory of accumulation would-
no doubt be very complicated, and it is possible
to argue that “ discounting the future ” should
play some part in it. But it can easily be seen
that that part must be a minor one. • For in a
world in wliicli it was predominant there would
be no problem of unemployment. As soon as
unemployment appeared in such a Avorld, it
would only be necessary to lower the rate of
interest. Owners of wealth would then increase
theii’ expenditure (present pleasures being pre-
ferred at the lower rate of return on waiting), A

net payment which he received for the nse 6f the wealth may ho
regarded as affording a numerical meoBure of that reward.” [Foot-
note] ”« . . it is perhaps best to soy that there ore tliroe factors of
production, land, labour and the sacrifice involved in waiting **
(Book Vn, chap. Vii,' p. 614). Here Marshall clearly regards toaxiing
as simply owning capital. In lator editions this passage was dropped .
and vMxiing came' to imply saving. Mr. GuiUebaud has pointed out
to me that in the seventh edition. Book lY, chap, vii, § 8, p. 233, a
passage similar to the above occurs in connection with accumulation.
In that context it becomes extremely obscure.

AN ESSAY ON MARXIAN ECONOJHCS

boom in the luxury industries would develop,
investment to increase their capacity would
become profitable, and (allowing time for labour
to move from one industry to another) unem-
ployment would disappear. Poverty and social
injustice would remain, but unemployment could
be no more than a passing accident.

It would be hard to maintain that this picture
corresponds to reality, and that all the disasters
of unemployment are due to some impediment
which prevents the rate of interest from falling
fast enough and far enough to fend them off.
Professor Cassel,^ indeed, has maintained- some-
thing of the sort. But his argument was directed
to proving the “ necessity of interest ”, and as
soon as we transfer it to the context of the ^
problem of unemployment, its lack of plausi-
bility becomes glaringly obvious. . Certainly the
existence of the rate of interest tends to limit
the supply of capital (this point will be discussed
in the next chapter), but the rate of interest can-
not be identified with the necessary supply price
of waiting.

To examine the notion of net profit as the
supply price of risk-bearing it is necessary to dis-
tinguish between two ways of usmg the apparatus
of equilibrium analysis. One method is to take
the assumption of static conditions literally. If
demands for commodities, techmques of produc-
tion and supplies of labour and natural resources
remain unchanged for long enough to allow the

* The Nature and Neceasits of Interest, p. 148.

68

THE ORTHODOX THEORY OF PROFIT

stock of capital to be adjusted' to them, static
equilibrium is established, and, once it is estab-
lished, nothing alters, and to-day is a mere
repetition of yesterday.

In such conditions, all .industries would settle
do^vn to routine and there would be no scope for
enterprise and innovation. There would then
■be no function for the entrepreneur to perform,
and it is argued, for instance by Wicksell,^ that
the earnings of the entrepreneur would sink to
the level of a manager’s salary. Capital would
earn no more than the rate of interest, and net
profit would disappear, for if an individual
“ could obtain a share of the product merely
in his capacity of entrepreneur . . . everybody
would rush to obtain such an easily earned
income But this argument does not hold
water. The mere fact that an entrepreneur
performs no useful function is not a sufficient
guarantee that he receives no income. . If
publicans took no part whatever in running
their houses it does not follow that competition
would eliminate the commission on selling beer,
for competition is limited by the number of
licences which the authorities choose to issue.
In industry, the licence to take part in the
pursuit of profit consists in owning some capital,
or commanding some credit, with which to make
a start. Competition, could eliminate net profit
only if there was complete freedom of entry into
industry, and freedom of entry is not entailed

^ Lectures, Vol. I, p. 126. ^ WickaeU, loc, cit.

67

AN ESSAY ON MARXUN ECONOMICS

tbe postulate^f static conditions. It requires
either that any in^vidual can borrow indefinite
amounts of capital, at the ruling rate of interest
(a situation 'which is certainly not to be found,
in reality), or that pro.duction can be carried on
in units. requiring ininute quantities of capital.
Wieksell’s argument can be plausibly applied to
some lines, such as cotton weaving or retail trade,
where the skilled worker has a chance to become
a small capitalist, though even in these trades
the threshold of capital is too hi gh for the un-
skilled worker to cross. But such trades are
•iioivadays the exception, and even where they
survive they are retreating before the advance
of large-scale enterprise. Modern technique, as
Marx pointed out, fosters the concentration of
capital, and the level of profits is supported by a
scarcity of enterprise which is not due to' -the
real cost of nsh-hearing, but to the scarcity of
individuals who have anything to risk.

The property ^qualification for entry into
industry differs ' considerably between different
liuBR of activity, and if the static world is
imagined to contain the same technical methods
and the. same inequality of wealth as are found
in reality, its industries must be imagined to
st^nd in a hierarchy, the level of profits being
Iiigher where entry is more difficult. Large
capitals would be found in the trades enjoying
a high rate of profit, while small capitals would
be crowded into the low-profit trades.

•Marx, like Wicksell, neglects the hierarchy of,
68 ■ '

THE OETHODOX THEORY OF PROFIT

profits and uses tlie simplifying assmnption that
the rate of profit tends to equality in all lines of
activity, but in his hands it is a simplification of
an entirely different order from that employed
by Wicksell to show that profits are not only
uniform, but uniformly zero. For Wicksell is
abstracting from the most characteristic feature
of the capitalist system, while Marx- is merely
abstracting from certain differences between one
industry and another.^

^The hierarchy of profits consists of the levels
of profits, in different industries, which are just
not high enough to attract new competition. In
dynamic conditions' profits stand above their
level in the hierarchy during the period of
expansion of new industries, and stand below it
when an industiy is over-expanded relatively to
demand (a situation which may persist for
indefinitely long periods, since the level of profits
at which capital, once invested, is driven, out of
an industry is often much lower than the level
at which new competition is attracted in). A
census of profits, taken at any particular moment, ,
would show many industries out of place in the
hierarchy, while the average level of profits
departs from the equilibrium level whenever the
total stock of capital is changing^

The static method of analy^ is legitimate
when it is used to point out, by contrast, what
is the behaviour of profit in a dynamicvworld. But
often it is used rather to suggest that, as net profit

^ Cf. obove, p. 2.

69

AN ESSAY ON MAEXIAN ECONOjncS

would disappear in equilibrium, it does not verj'
much matter, and can safely be neglected in the
analysis of distribution. This kind of argument
would be beside the point even if it were correct
on its own ground. For dynamic development, '
as Marx clearly saw, is inherent in the capitahst
system, and a static world would be entirely
different from the actual world of capitahsm in.
the most fundamental respects. The analysis of
static conditions, if taken literally, is no more
interesting than speculations as to what life
would be like on the moon.

Marshall does not fall intp the absurdity of
taking the static ^sumptions literally. He uses -
the conception of equilibrium merely .as an
analytical device. At any ihoment there is a
certain equilibrium position towards which the
system is tending, but the position of equilibrium
shifts faster than the system can move towards
any one position of equilibrium. Thus un-
certainty is kept alive and the cost of nsk-
hearing enters into the equilibrium supply price
of capital.^'

This analysis is a somewhat awkward cross
between static and dynamic theory. But it has
more serious defects than lack of elegance. In
Marshall’s system more risky industries require
a higher equilibrium level of profit than' steady
industries. This, in itself, is a merit of his theory,
for it obviously corresponds to something in

^ Cf. Pigou. Economics of ’WslforCt Appendix I: “Uncertainty-
bearing as a Factor of Production.”

70

THE OETHODOX THEORY OF PROFIT

reality-. But it obscures the influence upon
profits of the property qualifications which limit
entry into industry, and serves to distract atten-
tion (like Wicksell’s theory, though by a different
method) from the most essential characteristics
of the profit system.

Moreover, the notion of the cost of lisk-
hearing as an element in the supply price of
capital is, at best, distressingly vague. Mrst, it
applies, not to actual profits, but to expected
profits. In a world which is stable on the whole,
though uncertain in detail, some definite relation-
ship between actual present profits and expected
future profits might be established, but in un-
settled times the relationship is so complicated
and erratic as to defy analysis. Any number of
equally plausible hjqiotheses can be made about
it, and, indeed, the “reaction on business con-
fidence ” has become a deus ex machina which
enables economists to prove whatever they
please. Second, reluctance to expose wealth to
risk is essentially subjective, and there is no
method to discover the laws of its operation,
except by begging the question, and using the
actual level of profits to measure the cost of
risk-bearing. Third, the subjective element in
the supply price of capital must obviously be
influenced very much by the past experience of
capitalists, so that the level of profits which they
feel to be sufficiently attractive to justify enter-
prise is largely based on a conventional view of
what it is reasonable to expect.

71 ' F

AN ESSAY ON MARXIAN ECONOMICS

But this is not the worst, . Even if we could
form a clear conception of the equihbrium- rate
of profit, it would be irrelevant to the actual
world. The equilibrium rate of profit is that rate
which induces zero net investment. But over
the course of history, since the Industrial Revolu-
tion began, net investment has always been
going on. The actual rate of profit, therefore,
good years with bad, has exceeded the equilibrium
rate. Abnormal profits are the "normal rule.

Moreover, the experience of the inter-war
period suggests that the whole competitive
laisser-faire. system is adapted- to a strong
upward trend in capital accumulation. If capital
is not accumulating over the long run, disinvest-
ment in the slump must offset investment in the
boom, and to judge by the experience of the
nineteen-thirties, the competitive system could
not survive a series of slumps of the magnitude
induced by negative net investment. Beggar-
my-neighbour devices and monopoly schemes,
designed to protect the interests of one country
or one industry at the expense of the rest, and
expansionist policies, New. Deals and Experi-
ments, designed to increase activity on the
whole, drastically modify the operation of laiss&r
faire ; while any attempt to limit the depth of
slumps by reducing "the inequalities of incorne
must entail still more fundamental changes in
the profit system.

The whole apparatus of equilibrium theory "
therefore seems to be without application to
72

THE ORTHODOX THEORY OF PROFIT

reality. The Marshallian method of analysis is
based on the analogj^ of the pursuit curve. The
man on the bicycle is the moving long-period
position of equilibrium. The short-period situa-
tion follows the path of the dog running after
him. But the resources of mathematics fail us
if the dog is liable to bite through the tjrres of
the hicj’cle when the man slows domi his pace.

If the orthodox notion of a definite supply
price of capital thus disintegrates upon examina-
tion. we are left vath nothing but Marx’s notion
that capital is accumulated and maintained be-
cause it is the nature of capitalists to accumu-
late. The lack of a clear treatment of the
inducement to invest is, as we have seen,^ a
wjsalcness in Ms treatment of crises, but from a
long-period point of view it may well be that it
is imimportant, and that any prospective level
of profit, within very wide limi ts, is sufficient to
keep the system ru nnin g. ]\Ir. Kejoies puts for-
ward, though in more kindlj'^ language, the same
view as Marx : “ Most, probably, of our decisions
to do something positive, the full consequences
of wMch will be drawn out over man}"^ days to
come, can only be taken as a result of animal
spirits — of a spontaneous urge to action rather
than inaction, and not as the outcome of a
weighted average of quantitative benefits multi-
pHed by quantitative probabilities. Enterprise
only pretends to itself to be mainly actuated by
the statements in its own prospectus, however

» See p. 69.

73

Air ESSAY ON MARXIAN ECONOMICS

candid and sincere. Only a little more than an
expedition to the South Pole, is it based on an
exact calculation of benefits to come.”^ “ It is
not necessary . . . that the game should be
played for such high stakes as at present. Much
lower stakes udll serve the purpose equally well,
as soon as the players are accustomed to them.” “
Thus, with the notion of the supply price of
capital, the moral justification of profit as a
necessarj’’ cost of production disappears, and the
whole structure of the orthodox apology falls to
the ground. -

* General Theory, pp. 161-2. ' Ihii- p. 3M-

74

CHAPTER 8

THE GENERAL THEORY
OF EMPLOYMENT

So far we have considered the orthodox theory
of long -period equilibrium — the theory which
applies to a situation in which the stock of capital
is adjusted to circumstances, with zero net
investment. The process of adjusting the stock
of capital to any change in circumstances takes
a long time to work through. It is therefore
necessary to supplement the long-period theory
by an analysis of the short-period situation, in
which the process of accumulation is going on.

The orthodox short-period theory was never
very precisely stated,^ but its main outline seems
to have been as follows: at any moment the
rate of profit is determined by the marginal pro-
ductivity of the stock of capital in existencp.
At the rate of interest corresponding to that rate
of profit there is a certain rate of saving which
the community is w illin g to undertake, and it
is the rate of saving which governs the rate of
increase in the stock of capital.®

^ Cf. Keynes, Qemral Theoryt p. 196.

^ Oil this capital theory of the rate of interest Marshall super-
imposes a monetary theory, by '^hich an increase in the stock of gold

76

A2J ESSAY ON MARXIAN ECONOMICS

The controversies which- have developed in
recent years around this theory turn on its
application to the problem of unemployment.
But in the orthodox scheme the theory of-
employment scarcely existed, and in its original
setting the chief use to'-which the argument -was
put was to justify the unequal distribution of
income. Unequal distribution is favourable to
saving, since it concentrates, large incomes in
the hands of a few individuals who can saturate
their demands for consumption and accumulate
wealth -without any uncomfortable tightening of
the belt. Thus any .assault upon inequahty, for
instance by heavily progresave taxation, is held
to be dangerous to society, since it dries up the
source of capital accumulation and so prevents'
economic-progress.^

This argument is somewhat sophistical, even
on its own ground. If society is conceived to be
presented with the choice bet-ween a more and
less equal distribution of income, -with a correr
spbndingly lower of higher ra-te of capi-tal accumu-
lation, it is clear that, by choosing the higher rate

lowers the rate of interest. But the part played by the stock of gold,
at any moment, in influencing the level of the rate of interest he
does not discdss. (“ Evidence before the Gold-Silver Commission ”,
OMmal Papas, p. 23, p. 38, p. 130). The failure to reduce these
two theories of the rate of interest to a consistent system has been
a fruitful source of confusion amongst Marshall’s successors. Cf.
General Theory, p. 183.

1 Cf. my "Economist’s Sermon” (Essays). Marshall did not
take this view, but held, on the contrary, that a measure of re-
distribution “ made quietly and without disturbance ’ ’ might actually
promote the growth of material wealth. Principles (seventh edition),
p. 230.

7B

THE GENERAL THEORY OP EMPLOYMENT

of accumulation, society throws the biurden of
abstinence, not upon the individuals who actually
do the saving and enjoy the consequent possession
of wealth, but upon the individuals whose income
would have been larger if distribution had been
more equal. There is therefore a strong presump-
tion that too great a burden of abstmence ■ndll
be imposed upon the mass of the population —
those who ehjoj' the benefit bearing no part of
the cost. It was, indeed, argued that, in the
long run, the poor gain from the saving of the
rich, since accumulation raises productivity and
the general standard of life. But no one would
praise the prudence of a man who ruined the-
health of his children bj"^ starvation in order to
bequeath a fortune to his grandcliildren.

Moreover, if society is conceived to tolerate
inoqualit3'’ in order to promote saving, it is
obvious that a large part of the higher incomes
runs to waste in providing the rich mth a
luxurious standard of life. Unequal distribution
of income is an excessively uneconomic method
of getting the necessai3’’ saving done. The argu-
ment that inequality is justified because it pro-
motes saving turns inside out, and becomes an
argument in favour of corporate saving by the
state combined uith an egalitarian distribution
of consuming power.

. But an attack upon the orthodox position
has recently developed from quite a different
quarter. Mr. Keynes, in his General Theory of
Emplmjmenl, Interest amd Money, challenged the
77

AN ESSAY ON MARXIAN ECONOMICS

view, taken completely for granted in the
orthodox scheme, that saving promotes accumu-
lation of capital.

He points out that the theory that 'the rate
of saving governs the rate- of accumulation
depends upon the assumption of full employ-
ment. If full e'mplojmient is guaranteed, invest-'
ment in real capital cannot increase unless con-
sumption declines, so as to release, labour for
the investment industries. And every decline
in consumption must he offset by an increase in
investment to absorb the labour released. The
rate of investment is then governed b}^ the desire
of the community to save. But the guarantee
of full employment is to be found in the orthodox
theory, not in the actual working of the capitalist
sjfstem. A theory which leaves no room for
unemplojunent cannot claim to be relevant to
the modern world, even if it was relevant (which
is disputable) to an earlier stage in the develop-
ment of capitalism.

In Mr. Ke3Ties’s scheme the rate of invest-
ment depends, not upon the amount of saving
which the community wishes to perform, but
upon the view which the entrepreneurs take of
the profitability of new capital, compared to the
rate of interest which they have to pay on
borrowed funds. When entrepreneurs decide,
for whatever reason, to increase the rate of
investment, activity is increased and income
consequently rises. An increase in income
normally leads to an increase in consumption by
78

THE GENERAL THEORY OF EJIPLOYMENT

-the commimity whicli is less, than the initial
increase in income, so that saving rises with
income. It is the- rate of investment which
governs the rate of saving, and not vice versa.
An increase in the desire to save shows itself, in
the first instance, in a reduction in outlay on
consumption goods. This reduces income, so
that the increased saving fails to materialise.
At the same time the profitability of the con-
sumption-good industries is reduced, so that the
rate of investment is more likely to decline than
to increase. In short, saving, though it is a
necessarj’^ condition for capital accumulation, is
not a sufficient condition.

This argument is in linewith Marx’s analysis of
reproduction in terms of the balance between the
consumption-good and capital-good indufetries,
and develops the theory for wliich he laid the
foundation. In particular, Marx’s contention
that the excess of surplus value over capitalists’
consumption (the rate of saving) is limited by
the sum of outlay on new capital goods (home
investment), the excess of exports over imports
(foreign investment) and production of gold,^ is
reinforced by Mr. Kejmes’s argument. Many
refinements and complications (for ‘instance, the
effect of working-class saving, of unemployment
pay and of government borrowing), neglected by
Marx, are elaborated in the Keynesian theory,
hut the main outline. is clearly to be seen in
Marx’s analysis of. investment as “ purchases

> See above, p. 56.

79

AN ESSAY ON MAEXIAN ECONOJIICS

without sales ”, and saving -as “ sales without '
purchases

The consequences of Mr. Keynes’s attack
upon orthodoxy are very far-reaching. - First,
it cuts the ground from under, the pretended
justification of inequality, and allows us to see'
the monstrous absurdity of our social system
with a fresh eye.

Next, it shows that there is no automatic
self-adjusting mechanism in the laisser-faire
system Avhich tends to preserve full employment.
According to one strand of thought, m the ortho-
dox doctrine, this mechanism is provided by the
free play of bargaining in the labour market.
Any individual can always get work by offering
himself at a lower wage than that ruling in the
market; wages measure the iimtilityol labour^
and if the workers as a whole choose to stand
out for a level, of wages at which they are not
all employed, the consequent unemployment is
“ voluntarjf ”, and cannot be regarded, properly
speaking, as unemployment at all,'“ . This argu-
ment, in Mr. Keynes’s view, is based on the
fallacy of composition. It does not follow that,
because anjf individual can obtain employment
by cutting AVages, the workers as a whole are
able to do so. This question is discussed in
Chapter 10 beloAV.

According to a second strand in the orthodox
doctrine a self-righting mechanism is provided by
the rate of interest. At anj'^ moment there is a

1 Of. abovo, p. 2. \ ’ General Thconj, p. 16-

80 ■ ■

THE GENERAL T H EORY OE EMPLOYMENT

certain gap ]between the total income corre-
sponding to full employment and the total of
consumption. If full employment is to be
achieved, this gap must be filled by investment.'
In the orthodox scheme, the rate of interest is
determined by the interaction of the supply of
saving coming from the community with the
demand for saving coming from the entre-
preneurs making investment, so that the rate of
interest tends to find the level at which entre-
preneurs ai'e willing to undertake a sufficient rate
of investment to fill the gap. But Mr. Keynes
shows that, if the rate of interest fails to balance
investment with saving, in such a way as to give
full employment, saving will be balanced to
investment by the failure of activity to reach
the level of full employment. Thus the process
of equalising saving with investment does not
provide any guarantee of full employment.

The orthodox theory is trying to solve two
variables with only one equation. Mr. Keynes
supplies the missing equation by showing how
the rate of interest depends upon the supply and
demand for money. Though Marx pays no atten-
tion to the monetary analysis of the rate of
■interest it is not incompatible with his system.
He opposed to the orthodox “ Quantity Theory
of Money ” (the theory that the level of prices
tends to vary with the quantity of money in
circulation) the view that the quantity of money
in circulation is determined by the demand for
it — that is by business habits, the state of
81

AU ESSAY ON MARXIAN ECONOmCS

activity and tlie level of prices.'^ The difference
between the quantity of money in 'circulation
and the quantity in existence is aibsorbed in
hoards When the demand for money in
circulation increases, hoards are reduced.® In
this Mr. Keynes agrees exactly -with Marx.
According to Mr. Keyes’s analysis a rise in the
demand for money in the active circulation
raises the rate of interest, and so induces owners
of wealth who were holding money to transfer
into interest-bearing securities, thus releasing
part of their hoards of money for the active
circulation.

Marx does, not discuss the relationship between
hoarding and the rate bf interest. He regards
interest merely as a mechanism by which surplus
is shared between the rentier and the active
capitalist. In his view, it is impossible to make
any generalisation about the behaviour of the
rate of interest ® — it is arbitrarily determined
by the push and puU of bargaining strength
between lenders and borrowers — and he attaches
no importance to its reaction upon other factors
in economic life.

In general, according to Mr. Keynes, the rate
of interest tends to fall when activity is low, and
the demand for money in the active circulation
is reduced. It thus tends to reduce the induce-
ment to -save and increase the inducement to
invest when employment falls off. Conversely

* Vol. I, pp. 92-9<“‘>. ° Vol. I, p. lliw>.

a Vol. ni, p. 426n'"'.

THE GENERAL THEORY OF EMPLOYMENT

it tends to rise when activity is high. Thus some
force still remains in the orthodox theory of the
rate of interest as a regulator of the -economic
system.^ On this basis a new defence of the
orthodox position has been erected which amal-
^mates the two lines of thought referred to
above. So long as there is unemployment, on
this view, money wages tend to fall, and the
fall in wages reduces the demand for money, and
so lowers the rate of interest. Thus it is possible
to find a sense in which it is formally true to
say that unemployment tends to bring about its
own cure.®

But, in general, the modern tendency in
academic theory is to attach httle importance to
the influence of the rate of interest on emploj'--
ment. On the one hand, it is pointed out that
the long-term rate of interest appears to vary
very little with movements in emplo3mient.* On
the other -hand, even when it does move, its
influence upon the inducement to invest is con-
fined to the sphere of housing and public
utilities, where long-lived capital is faced with a
comparatively stable demand. In other spheres,
the obsolescence of plant is so rapid, and demand
so chancy, that investment will be made only
when prospective gross returns very much exceed
the rate of interest, so that even a large proper-'
tionate. change in the rate of interest has a

^ Cf. my ’Introduction to Hie Theory oj Brnployment, p. 82.

^ Cf. Pigou, Money Wages in Kelation to Unemplo 3 mient ”,
Economic Journal, March 1938, p. 136.

^ Kalecki, Essayit, p. 114*

83

AN ESSAY ON MABXIAN ECONOMICS

»

negligible influence on the inducement to invest.
Thus the rate of interest, though its movements
teU ia the right direction, is too weak an influence
adequately to regulate the level of investment.

The reaction of the rate of interest on the
inducement to save has always been problem-
atical. The orthodox theory could stiU be
partially justified if it were possible to show
that saving is highly sensitive to changes in the
rate of interest. But this thread, as. we have
already seqn, is too weak to support the whole
weight of the orthodox argument.*

In the modern academic view, therefore, it
seems that the importance of the rate of interest
was very much exaggerated in the traditional
theory, and that Marx was after all not much at
fault in neglecting it altogether.

Mr. Keynes’s criticism of the orthodox theory
■was primarily concerned with the problem of
unemployment in its short-period aspect, but
incidentally it destroys the basis of , the long-
period theory of the supply price of capital. In
his scheme, the rate of interest appears as an
obstacle to accumulation. For a capital good to
exist, in the laisser-faiffi system, it is necessary
for it to earn a profit at least’ as great as can be
obtained- by lending at interest a sum of money
equal to its cost. Capital must, therefore, remain
scarce enough to earn the necessary profit, and
the higher is the rate of interest the scarcer
capital must be. Thus a high rate of interest

» See p. 66.

84

THE GENERAL THEORY OF EMPLOYMENT

(for what its influence is worth) not only retards
accumulation in the short run, but reduces the
stock of capital in the long run. Mr. Keynes
perhaps exaggerates the ease with which the
authorities can control the complex of interest
rates (though the present experience of a “ three
per cent, war ” provides a striking confirmation
of his views), but, in any case, it is clear t>hat the
lower the authorities succeed in setting the rate
of interest, the larger the stock of capital is
likely to be. Thus the notion of the rate of
interest as an element in the necessary supply
price of capital is deprived of its foundation.

The long-period extension of Mr. Kejmes’s
theory brings the problem of the reserve army of
labour into the foreground of the picture. The
propensity to save and the rate of investment
determine the level of real output, at any moment.
As time goes by, the productivity of labour
increases and the amount of employment corre-
sponding to a given "level output declines. Thus
the technique of production plays an important
part in determining the level of employment.

Knally, Mr. Keynes justifies Marx’s intuition
that the chronic conflict between productive and
consumptive power is the root cause of crises.
The maldistribution of income restricts con-
sumption, and so increases the rate of invest-
ment required to maintain prosperity, while at
the same time it narrows the field of profitable
investment, by restricting the demand for the
consumption goods which capital can produce.

86

AN ESSAY ON MAEXIAN ECOlJOMICS

Geographical discoveries and technical inven-
tions open alternative fields for investment,
while wars from time to time absorb huge quan-
tities of capital. Indeed, the survival of the
capitalist system bears witness to the fact that
long periods of rapid accumulation can occur.
But their recurrence is at the best of times
uncertain, and when the stimulus to investment
flags, the underlying contradiction between the
capacity to produce and the capacity to consume
comes to the surface in waste and misery, which
become more and more intolerable as their
causes become more clear. Sir. Keynes’s theory
gives strong support to Marx’s contention that
“ the real barrier of capitalist production is
capital itself

Marxist economists have on the whole tended
to gloss over the under-consumption element
in Marx’s theory,, and Rosa. Luxemburg, who
developed it most clearly, is generally regarded
as heretical. Under-consumption theories have
been associated with an appeal for reform rather
t,1in.Ti revolution — with the view that capitalism
might be made to work satisfactorily — and for
this reason they are uncongenial to the Marxist
creed.

The association of under-consumption theory
with a desire 'to preserve freedom of enterprise
' and a distaste', for revolution is once more ex-
emplified in Mi.' Keynes, who regards his own
theory as mibderately conservative in its
A vol. in, p. 293«"“).

THE GENERAL THEORY OF EMPLOYMENT

implications”,-^ and finds the • philosophy of
GeseU more sympathetic than the philosophy of
Marx.® But this association is superficial, for
the maldistribution of income is quite as deeply
imbedded in the capitalist system as Marx
believed the tendency to falling profits to be,
and cannot be eliminated without drastic changes
.in the system. It is no harder to argue the case
for revolution, as opposed to reform, on the basis
of the analysis in Volume 11 of Capital than on
the basis of Volume III.

* General Theory, p. 377. * p- 365.

87

CHAPTER 9

IMPERFECT COaOPETITlON

The experience of slump conditions in the inter-
war period, Avhich gave rise to Sir. Kejmes’s
theory of emplo 5 'ment, also led to drastic modi-
fications in the orthodox theory of prices.

The orthodox theory is based upon the
assumption oi perfect competiiaon. binder per-
fect competition no individual producer can
affect the price of his commoditj' by altering his
rate of output. Each producer is conceived to
maximise his profits b}"^ producing such a rate
of output that marginal cost to Jum is. equal
to price — marginal cost being defined as the
addition to total costs caused b3’- a small unit
increase in the rate of output. In the short
period, with given capital equipment, marginal
cost is equal to marginal prime-cost — the addi-
tion to outlaj' on wages, raw materials, power
and wear and tear entailed bj'^ a small unit
addition to output. Thus price, at anj'^ moment,
is equal to marginal prime cost, and the excess
of receipts over total prime costs, which provides
for overhead costs and profits, is equal to
TWfl.r gi na l minus average prime cost, multiplied
by output. .

IMPERFECT COIIPETITION

Now, in the general run of manufacturing
industry, prime cost begins to rise sharply, as
output expands, only when the fuU capacity
output of the plant is approached. It follows
that, with perfect competition; any firm which
is working at less than full capacity output must
be losing the whole of its overhead costs, and
can have no motive for continuing production.^
Thus, under perfect competition the rule must
be: full- capacity output or no output at all.
But, in reality, full capacity working is a rarity,
even in times of average prosperity, while slump
cpnditions normally lead to a^reduction in the
rate of output from aU plant, rather than a
complete cessation of production from some
plants, side by side Avith full capacity working
for the rest. It appears therefore that, in
reality, perfect competition in selling com-
modities cannot be the rule, and that the excess
of price over prime cost cannot be accoimted for
solely by the difference between marginal and
average, prime cost.

To meet this difficulty a new type of analysis
was developed. In this it is assumed that the .
individual producer is not faced by a price for
his commodity over which he has no influence,
but, on the contrary,' that an increase in his out-
put can be sold only if he lowers his price, or
undertakes greater selling costs, for advertise-

^ ‘Iilarshall was aware of this, difSoulty, and to solve it he called
in imperfect competition under the guise of fear of spoiling the
market ** {PrincipleSf seventh edition, p. 375}.

89

AN ESSAY ON MABXIAN ECONOMCS

ment and the like. The sacrifice in price
required to make a small increase in his rate
of output saleable (neglecting selling costs) is
represented as depending upon the elasticity of
demand for his particular product, that is, the
ratio of the proportionate change in his sales to
the proportionate change in price. His profits
are maximised when price is equal to Tnn,rgTnfl.1

cost multiplied by where c is the elasticity

of demand for his product. For instance, if e is
equal to 3 (the proportionate increase in sales
is three times the proportionate fall in prifce),
price exceeds marginal cost by 50 per cent. This
pro^ddes an explanation of the excess of price over
prime cost which does not depend upon a difiei-
ence between marginal and average prime cost.

Imperfection in the labour market has to be .
considered, as well as imperfection in the market
for selling commodities. In the orthodox anatysis
of perfect competition each individual employer
is conceived to be faced by a given wage rate,
independent of the amount of labour which he
• emploj's, since the amoimt of employment he
offers is too small a proportion of the whole to
affect the wage rate. He is conceived to offer
employment up to the pomt at which the mar-
ginal productivity of labour (the addition to
value of output made by employing one more
man) would fall below the wage if any more men
were employed. Marginal productivity is thus
equated to the wage.

00

IMPEEFECT COMPETITION

This picture of perfect competition in the
labour market is even further from reality
.than perfect competition in selling commodities.
Where labour is unorganised each employer is
likely to be faced with a group of workers who
have few or no alternatives to working for him,
so that they are obliged to take what wage he
offers, while to attract labour from further afield
he would have to offer a higher wage. It is then
to his interest to proceed upon the principles of
monopsony (monopoly buying) and confine his
offer of employment to the workers who can be
had most cheaply, when due account is taken of
their efliciency.

Where collective bargaining is the rule, wages
are fixed by agreement for the trade as a -whole,
and each employer may be conceived to take on
that number of men which will equate marginal
productivity to the wage, according to the rules
of competition. But we still have to reckon
with the over-aH monopsony of employers as a
class, which is no less important to-day than
when Adam Smith observed that “ Masters are
always and everywhere in a sort of tacit, but
constant and uniform, combination, not to raise
the wages, of labour above their actual rate •
The mar g inal productivity of labour to the
individual employer tends to be greater than the
wage whenever, in order to press employment
to the point at which marginal productivity is
reduced to equality with the wage, it would

• WeaWi oj Nations, chap. viii.

91

AH ESSAY ON MABXIAN ECONOMICS

be necessary to bid for labour against other
employers — “a most unpopular action, and a
sort of reproach to a master among his neigh-
bours and equals

According to this analysis, the main influence
upon the share of labour in the total product
is the degree of imperfection of competition iu
selling commodities and in buying labour. At
each stage of production, from the raw-material
industry to the retail shop, the seller takes a
rake-off on prime cost, governed by the elas-
ticity of demand in that market, and the rake-
off' at one stage enters into prime cost at the
next.

In the market for consumers’ goods a rela-
tively small number of sellers face a large
number of buyers, so that the imperfection of
competition tells in favour of the sellers.’ In the
labour market the position is reversed. Thus the
share of labour in total output is ground between
the upper and the nether millstones of monopoly
and monopsony.

This account of the matter bears a close
resemblance to the theory of Lexis, quoted' by
Engels in the preface to Volume III of Capital } .
“ The capitalist sellers, such as tlie producer of
raw materials, the manufactm’er, the wholesale
dealer, the retail dealer, all make a profit on
their transactions, each selling liis product at
a higher price ' than • the purchase price, each
adding a certain percentage to the price paid by

1 Vol. in, pp. 19-20.

. 92

niPERFBCT COMPETITION

him. The labourer alone is unable to raise the
price of his commodity, he is compelled, by his
oppressed condition, to sell his labour to the
capitalist at a price corresponding to its cost of
production, that is to say, for the means of his
subsistence. . . . Therefore the capitalist addi-
tions to the prices strike the labourer with full
force and result in a transfer of a part of the
value of the total produce to tlie capitalist class.”
Engels gives (though grudgingly) his approval
to tliis formulation which, he says, “ amounts to
the same thing as the Marxian theory of surplus-
value ”. Lexis thus provides a bridge between
Marx and the modern theory.

But while there is a certain moral affinity
between the modern theory and Marx’s analysis,^
formally they are quite different. For in Marx’s
scheme under-capacity worldng is impossible and
the limit to the output of any concern is set, not
bj' the imperfection of the market, but by. the
capacity of capital. The modern theory exposes
many relatively minor defects in capitalism which

13 curious to observe transmutation of the notion of
“ exploitation ** which talces place under the influence of the modem
theory. In the orthodox scheme labour is exploited " when (owing
to the influence of monopoly) it receives less than the wage wliich
would rule under perfect competition (see p. 25 above). In Marx's
scheme labour is exploited to the extent that capital earns a net
return. In the modem scheme the whole, not on^ of interest and
net profit, but also of overhead costs, is, in a formal sense, a monopoly
profit, and therefore, in the orthodox sense, is the result of exploita-
tion, though some part of it covers necessary costs of production.
Moral and analytical considerations thus become inextricably con-
fused. The trouble arises from'attempting to apply the criterion of
perfect competition to a world in whi(^ it is never found in its pure
textbook form.

93

AJ\ iiJSSAY 03Sr MARXIAN ECONOMICS

Marx, concentrating on major issues, was con-
tent to ignore.

The theory is good enough for purposes of a
general discussion , of the nature of the system.
But its foundations are too shaky to hear a
superstructure of exact analysis. For the econo-
. 6 ,

niist is a magical formula, hut for the busi-
ness man the elasticity of demand for his product
is at best a very vague conception. It can only
be discovered by trial and error, by instinct or
by guess-work. Trial and error are dangerous.
Trial may involve a price-cut which will debauch
consumers and. “ spoil the market ” by leading
to resentment when price is raised again. Error
involves loss. When times are not too bad, the
business man is content to let well alone.
Instinct and guess-work probably teach him no
more than to do the same as other people. The
• profit margin, or rake-off on prime cost, there-
fore, probably depends very much upon historical
accident or upon conventional views among
business men as to what is reasonable. And any
conventional pattern of behaviour which estab-
lishes itself amongst an imperfectly competitive
group provides a stable result.’ So long as all
adhere to the same set of conventions each can
enjoy his share of th6 market, and each can
imagine that he is acting accordiug to the strict
rules of. competition, though in fact the group
as a whole, by unconscious .coUusipn, are impos-
ing a mild degree of monopoly upon the market.

94

BCPERFECT COMPETITION

The profit margin, however it is determined,
can always be expressed -in terms of the formula

— For mstanee, if, m a certain case, price is

found to be equal to prime cost plus 50 per cent,
of prime cost,- we may say that the producer
concerned acts as though he beheved the
elasticity of demand in his market to be equal
to 3.’ But, by saying so, we add nothing what-
ever to our knowledge of how the profit margin
is determined.

The foregoing argument applies to the general
run of more or less competitive industry.
Wliere outright monopoly rules, or where a
group of commodities is produced by a few
powerful firms, there is great scope for indi-
vidual variations in policy, and it is hard to
make any generalisation at all as to what
governs the margin of profit per unit of output.

All this makes a serious breach in the smooth-
surface of the orthodox theory of value, and it
seems that economic science has not yet solved
its first problem — what determines the price of
a commodity ?

In his first statement of the theory of value
Marshall wrote : “ The great central law of

economic science ” is that “ producers, each
governed under the sway of free competition by
calculations of his own interest, will endeavour
so to regulate the amount of any commodity
which- is produced for a given market, during a
given period, that this amount shah, be just
95

AN ESSAY ON MAEXIAN ECONOiUCS ’

capable on the average of finding purchasers at
a remunerative price ”,*■ a remunerative price
being defined so as to allow for normal profits on
capital. This statement may be taken to mean
two quite different things. It may mean that
each .producer, governed by calculations of his
own interest, endeavours to maximise the profit,
at each moment, on his current rate of output,
by balancing margiaal cost against mar g ina l
gain. This interpretation has been pursued to
its logical conclusion bj"^ the modem academic
economists, and the pursuit, as we have seen,
has. left us bogged in the conventional profit
margin.

The other interpretation is that each producer
endeavours to fix, not the price which maximises
his current profit, but the price which will be
remunerative in the long-run. This at first sight
seems plausible, but it entirely begs the question
of normal profits, on which, as we have seen,
academic economics fails to provide any theory
which is relevant to the real world. Moreover,
even if the question of normal profits were settled,
it would still remain to inquire what level of
utilisation of equipment is nomal in the long
run. Generally speaking, the lower the level of
utilisation, good years with bad, the higher the
profit margin required to bring in an}?^ given level
of profits. But the higher the profit margin, other
things equal, the lower the level of utilisation,
for, given the expected fluctuations in demand,

* Pure Theory of Domestic Values, p. 3,

96

IMPEBFECT COMPETITION

the amount of capital seeldng employment in the '
industry is governed by the profit margin estab-
lished in the market. And the amount of capital
employed infiuences the average utilisation per
unit of capital. The three determinants, profit
per unit of output, profit per unit of capital,
and capital per unit of output, are aU inter-
dependent, aiid the whole analysis dissolves in a
haze of douht.

Marx’s assumption that capital is always used
to capacity cuts through the tangle. But his
analysis, as we have seen, yields no more than
the theory that the share of labour in output
depends upon bargaining power. The Marxian
degree of exploitation and the. academic formula

^ each provides merely a summary method of

representing the result of all the various forces
that are at work upon the distribution of the
product between labour and capital. Neither is
an independent fprce in itself, and neither yields
any simple and coherent law of distribution.

■ Yet an empirical law of distribution is
better established than most economic general-
isations. In a wide variety of times and places
statisticians have found a remarkable constancy
in the proportionate share of labour in output
as a whole.^ The variations which both the
academic economists and Marx would expect a
priori, .between boom and slump, and over the

^ The evidence for Great Britain and XJ.S.A. is summarised by

Kalecki, Essaye, pp. 14>18.

97

AN ESSAY OE" MARXIAN ECONOMICS

long run idtli technical change, fail, to appear
in the figures.

The Marxian theory might yield the explana-
tion that the development of trade-union power
has been just sufficiently rapid to prevent the
rate of exploitation from rising with the pro-
ductivity of labour/ while the academic theory
suggests that a secular rise in monopoly has been
just offset by a relative faU in raw-material
prices.® Both explanations are somewhat lame,
and the mystery of the constant relative shares
remains as a reproach to theoretical economics.

^ Cf. above, p. 39. * Keilecki, Essays, p. 33.

98

CHAPTER 10

REAL AND MONEY WAGES

Modern developments in academic economics,
as ire have seen, move away from traditional
orthodoxy towards Marx. But in one sphere the
movement has been in the opposite direction.
On the question of the relationship of changes in
money wages to changes in real wages, and of
changes in real wages to changes in employment,
Marx and the orthodox stand together, opposed
to the modern theory.

Generallj’^ spealdng, in the orthodox system,
it was taken for granted, ivithout much thought,
that a rise in money-wage rates, brought about
by a bargain between employers and employed,
entails a more or less commensurate rise in real-
wage rates, ^ and that a rise in real wages causes
a decrease in employment. In any one industry
the workers obtain a liigher real wage when their
money wage rises, for even if the product of the
industry is consumed by the workers, a rise in
its price, following the rise in its wages cost, will
make only a small reduction in the purchasing
power of money, so that the workers in that

' See Figou, “ Beal and Monej Wage Bates in Relation to
Unemployment ", Economic Journal, September 1037, p, 405.

09

AN ESSAY ON MARXIAN ECONOMICS

industry gain, wliile the countervailing loss is
thinly spread over the rest of the community.
Again, in a single country, an all-round rise in
money wages, even if it is accompanied by an
equivalent rise in home prices, leaves the prices
of imported goods unchanged in the first instance,
and so leads to some rise in real wages in the
home country. The orthodox economists seem
to have pushed the inquiry no further than this,
and appear never to have posed the question :
What happens when there is an all-round rise in
money wages in a closed system without inter-
national trade ?

There is no doubt what their answer ought
to have been. On the orthodox assumptions of
perfect competition, marginal prime cost is equal
to marginal wages cost in a closed system. An-
equal proportional rise in all money wages must
therefore lead to the, same proportional rise in
the level of prices of a given rate of output. It
follows that, unless something happens to alter
the rate of output, real wages remain unchanged
when money wages rise. But -this proposition is
not to be found in the orthodox -writings. On
the contra^, it was always assumed that the
money-wage bargain determines the real "wage,
and it was not until Mr. Xeynes challenged this
assumption that any discussion of the problem
was undertaken at all.*

1 The oliallonge was taken up by Professor Pigou {The Theory of
Unemployment, p. 101) but his most recent treatment of the subject
{Employment and’ Equilibrium) is substantially the same as that of
Mr. Keynes. - . ' •

100

BEAL AND MONEY WAGES

A rise in real wages was conceived to reduce
output in the short period (though here the
argument was excessively vague), while in' the
long run it was conceived to encourage the sub-
stitution of capital for labour, and so to- reduce
employment per unit of output. Thus it was
held that trade unions, by refusing to accept a
wage equivalent to the marginal product of the
total labour force, may cause a part of it to
be unemployed, and so upset the natural self-
righting mechanism of the Imsser-faire system,
which was believed to ensure full employment in
the absence of interference,

Marx goes even further than the orthodox
economists, for he argues explicitly that a rise
in money wages has no effect upon the general
level of prices. “ In the case of a general rise of
wages, the price of the produced commodities
rises in- lines of business where the variable
capital predominates, but falls, on the other
hand, in lines where the constant, or eventually
the fixed, capital predoihinates.” ^

It is essential to Marx’s argument that the

' Vol. H, p. 393^^"’^ Here Marx is evidently thinking in long-
period terms. His view is that, when wages rise, prices in the first
instance remain unchanged (see below, p. 106) so that profits fall by
the amount by which wages rise. Thus the rate of profit falls most
in those industries where wages cost is the highest proportion of
total costs. These industries therefore contract, while industries
where profits ere relatively raised expand. Prices therefore rise in
the first group of industries, and fall in the second, until the rate of
profit is restored to equality throughout industry at a new, lower,
level. If this interpretation is correct, the whole argument is based
on «gftiiTnin£ f what it requires to prove. It elaborates the consequences
of a rise in real wages, but does nothing to show that real wages will
rise.

101

A2f ESSAY ON MABXIAN ECONOMICS

rise in wages wliicli comes about when the
reserve army falls low and the bargaining posi-
tion of the workers is strong should be a rise in
real wages, not merely a rise in money wages
offset by a rise in prices. As we have seen,^ he •
maintains that there is a tendency for the
reserve army of labour to contract and expand
cycliclj’-. When the stock of capital is large,
relatively to the supply of labour, the margin of
unemplojonent is reduced and wages -rise. The
rise in wages reduces surplus, and slows up the
rate of accumulation. Tlhe reserve army (which
is fed bj'^ the natural increase of popnlatidn and
by the opening up of new fields for capitalist
exploitation) then has time to grow, relatively to
the stock of capital, while labpmr-saving inven-
tions reduce the amount of employment offered
by a given stock of capital. Unemployment is
thus increased, and wages fall again. This cycle
Marx identifies with the decennial trade cycle.”

Tliis identification is an error. The crisis of
the trade cycle is marked by a decline in total
output, but there is no point in Marx’s cj^cle at
which output declines. In his scheme the total
of output is determined by the stock of capital ;
the' problem of realising surplus does not arise,
there is no question of a deficiency of effective
demand, and in this part of Marx’s argument
Say’s Law holds undisputed sway. When real
wages- rise, -the rate of accumulation of capital
(which is governed by the amount of smplus) is
I Sre p. 37. . - - Yol. I, p. 646<««.

102

. REAL ARD MOREY WAGES '

slowed up, but the total of output, wage goods
and capital goods together, does not decline.
If technique remains unchanged, the total of
employment also is maintained, though a relative
increase in available labour is taking place ;
while, with inventions, a gradual fall in the total
of employment may take place, as old machines
are replaced by new ones which require less
labour to produce a given output. This is some-
thing quite different from the trade cycle. The
difference arises because, in Marx’s scheme, the
decline in the rate of accumulation is due
to a decline in the fund from which savings are
made, not from a slackening of the inducement
to invest.!

There may be. in reality a cycle of the type
which Marx analyses. But if so, it must be of
much longer period than the decennial trade
cycle (which he himself, in a different context,-
connects with the rate of investment -), since it
depends upon changes in the stock of capital,
and in the composition of the capital stock, and
these changes must be slow relatively to the
changes in the rate of investment, which mark
the trade cycle. The operation of Marx’s long-
period cycle has not been detected by the
statisticians, for, if it exists, it is swamped by

^ Aa was noted above (p. 34, n. 3), Alarx writes in this contest
** accumulation slackens in consequence of the rise in the price of
labour, because the stimulus of gain is blunted But this reference
to the inducement to invest is an aberration from the rest of the
aigument, and must be regarded as an isolated example of common
sense breaking in.

* See above, p. 64.

103

E

■ AN ESSAY ON MARXIAN ECONOMICS '

the more violent movements of the trade cycle,
and disturbed by bursts of invention, due to the
progress of science, as -well as by wars, geo-
graphical discoveries and other large-scale acci-
dents, which are not directly connected with the
scarcity of labour, or which, at any rate, cannot
be reduced to a simple relationship with it.

The confusion between this long-run cycle,
which might be found jn a world subject to Say’s
Law, and the short-run cycle of effective demand,
accounts for the ambiguity of Marx’s attitude to
the problem of under-consumption. Part of the
time he is accepting Say’s Law and part rejecting
it. Push in the Say’s Law stop, and effective
demand is dominant. — the poverty of the
workers is then seen to be the last cause of aU
real crises. Does it follow that a crisis would be
relieved by increasing the consuming power of
the workers ? PuU out the Say’s Law stop, and
the answer is no. With a given total output,
increased real wages means lower profits, and
lower profits — push back the stop again —
mean crisis.

When Marx is concerned to show that a
change in money wages alters, not the level of
prices, but the rate of exploitation, he appears
to contradict his own argument that a rise in
real, wages must cause a decline in output.

“ In consequence of a rise in wages, especially
the demand of the labourers for the necessities
of life will rise. In a lesser, degree their demand
for articles of luxury will increase, or the demand
104

BEAL AMD MONEY WAGES

will be . developed for tMngs which did not
generally belong to the scope of their consump-
tion. The sudden and increased demand for the
necessities of life will doubtless raise their prices
momentarily. As a result, a greater portion of
the social capital will be invested in the produc-
tion of the necessaries of life, and a smaller
portion in the production of articles of luxury,
since these fall in price on account of the decrease
in surplus-value and the consequent decrease in
the demand of the capitalists for these articles.
And to the extent that the labourers themselves
buy articles of luxury, the rise in their wages —
to this degree — does not promote an increase
in the prices of necessities of life, but simply
fills the place of the buyers of luxuries. More
luxuries than before are consumed by labourers,
and relatively fewer by capitahsts. That is all.
After some fluctuations, the value of the circu-
lating commodities is the same as before.” *
Here there is no reference .to the demand for
investment goods, but clearly Marx envisages
investment continuing, to the extent that the
decline in surplus allows, for he talks of new
capital being deflected from luxury to wage-good
industries. To complete the picture, he ought to
show that the output of capital goods, as weU
as of luxuries, falls off with the faU in surplus.
But the fall in capitalist outlay — on luxuries and
capital goods together — is exactly balanced by
the increase in workers’ outlay, and there is no
.» Voi. n, p. ssi'uu.

105

• h2

AN ESSAY ON JIABXIAN ECONOMICS

suggestion that the rise in real wages reduces the
total of output. This line of argument is con-
sistent with his long-run theory of fluctuations
in the industrial reserve army, precisely because,
both in this argument and in the theory of the
reserve army, the problem of effective demand is
ruled out, and Saji^’s Law is in force. Tor the
same reason it is inconsistent with the theory
that a rise in wages precipitates a crisis.

Marx was aware of the argument that an all-
round rise in money wages (in a closed system)
merely raises prices, and leaves real wages un-
changed. But he provides a very feeble answer
to it. “If it were in the power of capitalist
producers to raise the prices of their commodities
at win, the}'^ could and would do so without
waiting for a rise in wages.” ^ It would be just
as convincing to argue that a rise in the price of
raw cotton has no effect upon the price of yarn.
Under competitive conditions no one producer
can raise his price, unless all the rest do the same.
But if costs are raised for all, aU ca.n raise their
prices together. Marx goes on : “ The capitalist
class would Ujbver resist the trade unions, since
.the capitahsts could alwaj’^s . . . avail them-
selves of every rise in wages to raise prices much
higher and thus pocket greater profits.” “ This
argument neglects the conflict of interests be-
tween capitahsts. Each benefits by a rise in
the wages paid by his rivals, and loses by a rise

> Vol. H, p. 392(‘“>. The same argument is put forward in
Vuiue, Price and PrqfiL ® Vol. H, p. 392^^^®*.

106

REAL AlfD MONEY WAGES

in the wages which he must pay himself. .Each
group 'has an interest in resisting the particular
trade tmion with which it has to bargain, and it
does not follow from the fact that each separately
has an interest in low wages that all collectively
suffer from a rise in wages.

To a generation brought up under the shadow
of the “ vicious spiral ” of wages and prices,
Marx’s ^•iew that a rise in money wages leaves
prices unchanged appears flatly contrary to
common sense. It is easy, however, to under-
stand how he was led to adopt it. The view that
a rise in wages causes a corresponding rise in
prices was being used to show that the wage
bargain cannot influence real wages and that
consequently “ trade tmions have a harmful
effect Marx therefore had a strong motive for
advocating the view that wages do not influence
prices, and as this was the current orthodox
opinion, he had no difficulty in accepting it.

Since his day the position has been reversed.
In the year 1930 it was the opponents of trade-
unionism who were mainta ining that the chief
cause of the slump was the obstinate refusal of
the workers to accept a cut in wages. H a rise
in wages does not raise prices, a fall will not
reduce them. A cut in costs will increase profits,
and set the wheels of industrial activity revolving
again. To this view Mr. Keynes opposed the
argument that a cut in wages would waste itself
in a fall in prices, and he holds that the trade

^ Marx EngcU Correspondencej letter 83.

107

AN ESSAY ON MABXIAN ECONOMICS

unions “ are instinctively more reasonable econo-
- mists tban the classical school ” ^ since they
resist wage cuts with whatever power slump
conditions leave at their command. It is impos-
sible to imagine Mai-x reading the. Addenda to
the MacnuUan Report on Einance and Industry
and ^ding Professor. Gregory more sympathetic
than hir. Keynes.

But the question cannot he settled by sym-
pathy, and an exact analj^sis of the effect of
a change in money wages on employment is
extremely complicated. Under perfect competi-
tion an equal proportional change in all wages
(in a closed system) must lead to the same pro-
portional change in the level of prices of a given
output.' But in reality perfect competition does
. not prevail, and a change in wages may alter the
ratio of prices to prime costs. Many prices fail
to react iminediately to a change in wages cost
and this is generally true of house rents, which
plaj'^ a very important part in determining the
real value of the money wage. It seems reason-
able to suppose, therefore, that a rise' in money
wages wiU noriha% lead to some rise in real
wages, at least for a certain time after it ocem’s.“‘
■ But the next step in the orthodox argument
is bjJ^ no means obvious. Wages are more fully

1 -General Theory, p. 14.

= The introduotion of trade unions, -where none were before, is
likely to have an important effect in raising real wagra, by squ»zing
out monopsony profit. This eSect depends upon the introdnction of
a “ common rule ” (see above, p. 91. Of. my Economics of Imperfect
Competition, p. 395).

lOS

REAL AND MONEY .WAGES

spent than profits, and a transfer of purchasing
power from capitalists to workers stimulates the
demand for consumption goods and so tends to
incfease employment.^ It may be argued, against
this, that the inducement to invest would be
reduced hy a rise in wages, so that employment
m the investment-good industries would decline.
This is likely to he true of house-huilding, where
an expansion of demand, due to higher real
wages, is unlikely to offset the effect of higher
costs, and it may he true of other types of long-
hved equipment. On the other hand, investment
in equipment for the wage-good industries is likely
to be stimulated.

A further complication is introduced by the
effect of a rise in prices on the distribution of
total profits between rentiers and entrepreneurs.®

A rise of prices reduces the burden of debts
fixed in terms of money, and this may tend to
stimulate investment,® On the other hand,
rentier incomes are more fully spent than net
profits, which include the corporate savings of
firms, so that a redistribution of real total profits
unfavourable to rentiers may tend to restrict
consumption.* The effect of the redistribution

^ Cf. Kalecki, EsaaySf p. 84.

^ Marx habitually treats capitalist as a single class, and smphasiBes
the conflict between them and the workers. Mr. Keynes's argument •
reveals a subsidiary conflict between rzntitrs and entr^reneurs, in
which the workers side with the entrepreneurs. This conflict comes
clearly to the surface in conditions of hyper*inflation and, to a smaller
extent, under war-time inflation, when the fixed-income classes suffer
relatively more than any other section of the community.

^ See Kalecki, Essays, p. lOG. * Ibid. p. 87.

100

AN- ESSAY ON MARXIAN ECONOMICS ’

on employment may tlierefofe tell in either
direction.

The argument is thus not very conclusir-e,
but 'it serves to show, at least, that the view,
held both by Marx and the orthodox economists,
that a rise in wages necessarily causes a fall in
employment, cannot be maintained.

The relationship between the Keynesian and-
the M^xian view of wages is curious. Marx,

. -with the orthodox economists, holds that a rise
in money wages causes a rise in real wages, and
that a rise in real wages causes -unemployment.
Mr, Keynes holds that a rise in money wages has
little effect upon real wages, but that, a' rise in
real wages tends to increase employment. Both
agree that a rise in money wages would be of
little use at a time of crisis, Marx because he
holds that it -will raise real wages, Mr. Keynes
because he holds that it will not. But they
completely disagree as to the effect of a fall in
money wages in a crisis, Marx holds that it
brings temporary relief, and enables expansion
to be resumed “ within capitalistic limits
while Mr. Keynes holds that it can do nothing
but harm. The matter can be finally settled
only by detailed statistical investigation, but in
the nineteen-thirties the crude test of experience
seemed certainly to be on Mr. Keynes’s side,
and many were then, disillusioned who formerly
believed in a cut in wages as a cm’e for slump
conditions.

» Vol. m, p.

110

CHAPTER 11

DYNAMIC ANALYSIS

The foregoing argument has left a trail of
questions to which neither Marx nor the academic
economists, ancient or modern, provide satis-
factory answers, and the impression which it
gives of the present state of economic knowledge
is not encouraging. It has generally been the
fate of economic theory to run a losing race
against the course of history, and never to have
completed the analysis of one phase of economic
development before another takes its place. It
seems Ukely enough that the same fate will be
fulfilled once more. But, if time allows, the
questions ought to be answered.

The outstanding questions may be divided
into two groups : those wliich concern the '
division of the social product, and those which
concern the size of the product. To the first
group belongs the question of the profit margin
on which, as we have seen, modem theory is
highly agnostic, as well as the complex question of
the relationship between real and money wages.

These problems are formidable, but they
might yield to a combioation of field investiga-
111

AN ESSAY ON MARXIAN ECONOMICS

tion and statistical study. The divorce between
theory. and realistic investigation, which is a
standing reproach to academic economics, has
been due in the main to the preoccupation of the
theorists with propositions about equilibrium
conditions, on which, in the nature of the ease,
evidence from the real world can throw no light
at all. There are already signs that, when the
theorists begin to ask answerable questions, -
the ■ statisticians need not despair of firKting
the answers.

If the problem of the profit margin could be
solved, it would isolate one major influence upon
the distribution of the social income between
classes, and would prepare the way for an
investigation of the factors govemnig the rate of ■
profit' on caj)ital. It may be, however, that the
mystei^’' of the constant relative shares will not
yield to this type of analysis, and that a totally
new method is required for its solution.

Questions concerning the total of. output may
be grouped imder two heads — potential produc-
tion and eflFective demand. The first is governed
by the supplies of the factors of production, and
by technique, • The study of supplies of natural
resources and of labour involves the whole prob-
lem of Imperialism, on which the' hints thrmvn
out by Marx have been elaborated by later
Marxists, and which requires to be reviewed in
the light of modern. analysis. .The study of the
supply of capital involves theoiptical problems
which impinge .upon each of our unsolved
112

DTNiUnC ANALYSIS

questions. The overthrow of the orthodox
notion of an equilibrium supply price of capital
leaves a huge gap in our analj^sis, and it seems
vain to attempt to fill it -with an alternative
abstract theory. The problem must rather be
approached, as SIar.x approached it, in terms of
histor5'’ — the stock of capital at any moment is
the result of developments in the immediate and
the remote past, and the stock of capital in
existence is an important factor in the deter-
mination of its omi rate of growd}h.

Technical Imowlcdge, in academic tlicorj^ is
usually treated as an arbitrary' datum, but Marx
is clearly right in arguing that it is largel}'
influenced by the relationship between the supply
of labour and the supply of eapital. Here, again,
an historical approach is the most promising.
The influence upon technique of factor prices —
the rate of interest and the level of real wages,
— elaborated in the orthodox tlieorj^, must also
be studied by realistic methods.

Problems of effective demand may be
examined under the Kejniesian categories of the
propensity to consume and the inducement to
invest. On the first, the main influence is the
distribution of income, but there are other
elements Jilso in the problem, and the whole
natural history of consumers’ demand requires
to be studied.

The inducement to mvest involves the prob-
lem of the rate of interest. We need to know,
first, how the complex of interest rates reacts to
113

AN ESSAY ON MABXIAN ECONOMICS

various circumstances and various policies, and,
second, ho-w investment reacts to changes in
interest. The true balance between the orthodox
exaggeration of the importance of the rate of
interest, and Marx’s complete neglect of it can
only be struck by realistic investigation.

The problem of indebtedness and the relation-
ship between a concern’s own capital and its
outside borrowing is also involved in the prob^
lem of the inducement to invest, and the legal
framework and financial practice in various
countries has an important influence on it.
Most important of all, the relationship between
current and expected profit, and the relationship
■between expected profits and the inducement to
invest, rhust be established. Here the statis-
ticians, meet with a formidable difficulty, for an
increase in the rate of investment both causes
and is caused by an increase in the rate of profit,
so that the evidence is hard, perhaps impossible,
to disentangle. Expectations about the future
introduce a subjective element into the causation
of investment which cannot be ruled out, or
reduced to simple objective terms, and the fact
that human beings learn from experience (though
not necessarily aright) means that history itself
is an influence upon history. The problem of the
inducement to invest can therefore probably
never be completely settled. But there is hope
at least that our ignorance of it can be reduced.

The theory of short-period fluctuations in
effective demand, opened up by Mr. Keynes’s
114

DYNAJnC ANALYSIS

General Theory, has already made gi’eat progress.
Marx was mainly coneemed with long-run
d3mamic anals^sis, and this field is still largely
untilled. Orthodojc aeademie anatysis, bound
up until the concept of equihbrium, makes little
contribution to it, and the modern tbeoiy Jbas
not yet gone much be3mnd the confines of the
short period. Chaiiges over the long run in real
wages and in the rate of profit, the progress of
capital accumulation, the growth and decay of
monopol3'’ and the l^irge-scale reactions of changes
in technique upon the class structure of society
all belong to tliis field.

Marx, however imperfectly he worked out the
details, set himself the task of discovering the
law of motion of cs,pitahsm, and if there is any
hope of progress in economics at all, it must be
in using academic Uiethods to solve the problems
posed by Marx.

115

REFERENCES TO “CAPITAL”

(1) Vol. I, ohap. 8. Constant Capital and Variable Capital.

(2) Vol. I, chap. 9. Tiie Kate of Surplus-Value. . § 1.’ The

Degree of Exploitation of Labour-Power.

(3) Vol. Ill, chap. 60. The Semblance of Competition.

(4) Vol. I, cliap. 8. .Constant Capitol and Variable Copitol.

(6) Vol. I, chap. 9. The Rate of Surplus-Value. § 1. The

Degree of Exploitation of Labour-Power.

(6) Vol. I, chap. 1. Commodities. § 1. The Two Eoctors of

a Commodity : Use-Value and Volue,

(7) Vol. I, chap. 9. Tlie_ Kate of Surplus-Value. § 1. Tlie

Degree of Exploitation of Labour-Power.

(8) Vol. I, chap. 26. The General Law of Capitalist Accumu-

lation. 1 1. The Increased Demand for Labour-Power
that Accompanies Accumulation, the Composition of
Capital Remaining the Same.

(9) Vol. HI, chap. 2. The Rate of Profit.

(10) Vol. 1, chop. 9. The Rate of Sprplus-Volue. § 1. The.

Degree of Exploitation of Labour-Power.

(11) Vol. U, chap. 8. Fixed and Circulating Capital. 1 1.

Distinctions of Form.

(12) Vol. m, chap. 4. Tlie Effect of the Turn-over on the

' Bate of Profit. . ■

(13) Vol. HI, chap. 16. Unravelling the iitemol Contradic-

tions of the Law. 1 2. Conflict between the Expansion
of Production and the Creation of Values.

(14) Vol. I, chap. 26. The General Law of Copitalist Accumu-

lation. § 3. Progressive Production of a Relative
Surplus-Population.

(16) Vol. HI, chap. 8. Different Composition of Capitals in
Different Lines of Production and Resulting Differences
in the Rates of Profit.

(16) Vol. HI, ohap. 10. Compensation of the Average Rate

of Profit by Competition.

(17) Vol. HI, chap. 12. Some After Remarks. § 3. Fluctua-

tions for which the Capitalist mokes Allowance.

116

REFERENCES TO " CAPITAL ”

(IS) Vol. m, chap. 10. Compensation of the Average Rafe
of ProBt by Competition.

(19) Ibid. -

(20) Ibid.

(21) Vol. m, diap. 38. Differential Rent.

(22) Vol. m, chap. 39. The First Form of Differential

Rent.

(23) Ibid.

(24) Ibid.

(25) Vol. m, chap. 46. The Price of Land.

(26) Vol. in, chap. 45. Absolute Groimd-Rent.

(27) Vol. I, chap. 1. Commodities. § 1. The Two Factors of

a Commodity : Use-Value and Value.

(2S) Vol. I, chap. 7. Tlie Labour Process and the Process
of Producing Surplus-Value. 1 2. The Produotion of
Surplus-Value.

(29) Vol. I, chap. 8. Constant Capital and Variable Capital.

(30) Ibid.

(31) Ibid.

(32) Ibid.

(33) Vol. I, chap. 3. Money, or the Circulation of Com-

modities. § 1. The Measure of Values.

(34) Vol. I, chap. 5. Contradictions in the General Formula

of Capital.

(35) Vol. I, chap. 1. Commodities. § 1. The Two Factors of

a Commodity : Use-Value and Value.

(36) Vol. I, clrap. 3. Money, or the Circulation of Com-

modities. § 2. The Medium of Circulation.

(37) Vol. m. Part VI. The Transformation of Surplus-Profit

into Ground-Rent ; chap. 37. Preliminaries.

(38) Vol. I, chap. 1. ' Commodities. § 1. The Two Factors of

a Commodity : Use-Value and Value.

(39) Vol. I, chap. 11. Rate and Mass of Surplus-Value.

(40) Vol. in, chap. 9. Formation of a General Rate of Profit

and Transformation into Prices of Production.

(41) Vol. m, cliap. 45. Absolute Ground-Rent.

(42) Vol. I, chap. 7. The Latmur Process and the Process

of Producing Surplus-Value. § 2. The Production of
Surplus-Value.

(43) Vol. in, chap. 47. Genesis of Capitalist Ground-Rent.

§ 1. Introductory Remarks.

(44) Vol. I, chap. 8. Constant Capital and Variable Capital.

(45) Vol. ni, chap. 48. The Trirritarian Formula, § 3.

(46) Vol. I, chap. 12. The Concept of Relative Surplus-Value.

(47) Vol. I, chap. 25. The General Laws of Capitalist Accumu-

117

All ESSAY ON IIARXIAN ECONOMICS

lation. § 2. EclatK-o Diminution of the'Yariable Part
of Capital. .

(IS) A^o!.- I, chap. 15. Maciunery and Modem ladustry.

§ 6. Tile Theory of Compensation as regards the Work-
people displaced by Machinery.

(49) Vol.' in, cliap. 32. Monos'-Capital and Actual Capital ■

{conchidcd).

(60) I'd!. I, cliap. 32. Historical Tendencj' of Capitalist

Accumulation.

(61) Vol. Ill, chap. 17. Commercial Profit.

(62) Vol. I, chap. 18. Various Formula: for the Bate of

Surplus-A'alue.

(63) A^jl. m, chap. 10. Compensation' of the Average Bate

of Profit by Competition.

(54) Wol. in, chap. 39. Tho First Form of Difiercntial
Bent.

(65) Vol. n, Part m. Tho Reproduction and Circulation of

tho Aggregate Social Capital : chap. 18. Introduction.

§ 2. Tho Role of Money Capital.

(50) Vol. in, chap. 49. A Contribution to tho Analysis of the

Process of Production.

(57) Vol. I, diap. 1. Commodities. 5 4. Tlie Fetishism" of
. Commodities and tho Secret ^ereof.

(58) A''ol. ni, chap. 16. Unravelling tlie Internal Contradictions

of the Lair. § 4. Supplementary Remarks.

(69) •A’'oI. n, chap. 10. The Tum-over of tho Variable Capital. ,
§ 3. Tlie Turn-over of tho Variable Capital, considered
from tlie Point of View of Society.

(00) Vol. I, chap. 24. The Conversion of Siuplus- Value into

Capital. § 3. Separation of Surplus-A'nlue into Capital
and Revenue.

(01) A^ol. Ill, chap. 15. Unravelling the Internal Contradic-

tions of the Lmv. 5 1. General Remarks.

(02) A''ol. I, chop. 25. Tho General Lav of Capitalist Accumu-

lation. 1 1. Tlie Increased Demand for Labour-Power
that Accompanies Accumulation, the Composition of
Capital Rcraaming tho Same.

(63) A''ol. I, olmp. 26. Tlie General Law of Capitalist Accumu-

lation. 5 3. Progressive Production of a Relative
Surplus-Population.

(64) Ibid.

(66) A^ol. I, chop. 0. Buying and Selling of Labour-Power.

(66) Vol. I, ciiap. 10. Tho Working Day. § 1. The Limits of

the AA'orldng Day.

(67) Vol. I, chap.- 15, Maohinery and Slodem Iridustry.

118

REFERENCES TO ■“ CAPITAL ”

§ 3. The Pro siin nte ESects of ]Vlicliinerj- on the Work-
man, (c) Intensification of Labour.

(68) Ibid, (a) Appropriation of Supplementarj- Labour-Power

by Capital.

(69) Wol. I, chap. 10. The Working Day. § 5. The Struggle

for a Normal Working Day.

(70) Vol. I, chap. 25. The General Law of Capitalist Accumu-

lation. § 1. The Increased Demand for Labour that
Accompanies Accumulation, the Composition of Capital
Remaining the Same.

(71) Ibid. § 3. Progressive Production of a Relative Surplus-

Population.

(72) Ibid.

(73) Ibid.

(74) Ibid. § 1. The Increased Demand foi; Labour-Power that

Accompanies Accumulation, the Composition of Capital
Remaining the Same.

(76) Ibid. § 3. The Progressive Production of a Relative
Surplus-Population.

(76) Vol. I; chap. IS. Machinery' and Modem Industry.

S 9. The Factory Acts.

(77) V9I. I, chap. 14. Dhdsion of Labour and Manufacture.

§ 5. The Capitalist Character of Manufacture.

(78) Vol. I, chap. 17. Changes of Magnitude in the Price of

Labour-Power and in Surplus-Value. § 1. Length of
the Working Day and Intensity of Labom: Constant.
Productiveness of Labour Variable.

(79) Vol. in, chap. 14. Counteracting Causes. '§ 3. Cheapen-

ing of the Elements of Constant Capital.

(80) Vol. m, chap. 13. The Theory of the Law.

(81) Vol. m, chap. 14. Counteracting Causes.

(82) Ibid. § 1. Raising the Latensity of Exploitation.

(83) Ibid. § 2. Depression of Wages below their Value.

(84) Ibid. § 4. Relative Overpopulation.

(85) VoL in, chap. 15. Unravelling the Internal Contradic-

tions of the Law. § 2. Conflict between the Expansion
of Production and the Creation of Values.

(86) Ibid. § 3. Surplus of Capital and Surplus of Population.

(87) A’'ol. I, chap. 3. Money, or the Circulation of Com-

modities. § 2. The Medium of Circulation.

(88) Vol. n, chap. 20. Simple Reproduction. § 2. The Two

Departments of Social Production.

(89) Ibid. § 1. The Formulation of the Question.

(90) Ibid. § 3. The Transactions between the Two Depart-

ments.

119

AN ESSAY ON MARXIAN ECONOMCS
(91) Vol.n,chap.20. §4. TransaetioasirithinDepartmentll.

(02) Ibid. § 11. Reproduction of the Fixed Capital.

(93) Ihid.

(94) Vol. n, chap. 9. The Total Tum-over of Advanc.ed

Capital. § 4. ■ • *

(95) Vol. II, chap. 16. ' The Tum-over of the Variable Capital.

§ 3. The Turn-over of the Variable Capital, considered
from the Point of View of Society.

(96) Ibid.

(97) Ibid.

(98) Vol. n, chap. 20. 1 11. Reproduction of the Fixed

Capital.

(99) Ibid. § 12. The Reproduction of the Money Supply. "

(100) Vol. II, chap. 21. Accumulation and Reproduction on

an Enlarged Scale. 1 1. Accumulation in Depart,
ment I.

(101) Vol. n, chap. 20. Simple Reproduction. § i. Transac-

tions within Department II.

(102) Vol. II, chap. 16.- The Tum-over of the Variable

Capital. § 3. The Tum-over of the Variable Capital,
considered from the Point of View of Society.

(103) Vol. in, chap. IS. Unravelling the Internal Contradic-

tions of the Daw. § 1. General Remarks.

(104) Vol. Ill, chap. 30. Money-Capital and Actual Capital.

(105) Vol. I, chap. 3. Money, or the Circulation of Com-

modities. § 2. The Medium of Circulation, (5) The
Currency of Money.

(106) IMd. § 3. Money, (6) Means of Payment.

(107) Vol. nr, chap. 22. Rate of Interest.

(108) Vol. m, chap. 16. Unravelling the Internal Contradic-

tions of the Law. § 2. Conflict between the Expan-
sion of Production and the Creation of Values.

(109) Vol. n, chap. 17. The Circulation of Surplus-Value.

§ 1. Simple Reproduction.

(110) Vol. I, chap. 25. The General Law of Capitalist Accumu-

lation. §3. Progressive Production of a Relative
Surplus-Population.

(111) Vol. n, chap. 17. The Circulation of Surplus-Value.

§ 1. Simple Reproduction.

(112) Ibid.

(114) Vol m, chap. 15. Unravelling the Internal Contradic-
tion of the Law. §2. Conflict between the Expansion
of Production and the Creation of Values.

120

INDEX

Abstinence, 25

Accumulation; see Investment

Capital, dates of publication,'

■ vii - T

references, 116-20
Cassel, 66
Class conflict, 1, 4
Commerce, 24 n.

Communist Manifesto, 38
Competition, 2
imperfect, 48, 90 et seq.
Constant capital, 7 ; see also
Organic composition
Crisis, theories of, 4, 63 et seq.,
102-4

Depreciation, 8, 15, 29
and renewals, 53
Discounting the future, 64,' 66
Disguised unemployment, 64n.
Disutility of labour, 2, 80
Douglas, Major, 53

Engels, vii, 18 n., 29 n., 42 n.,
. 92, 93

E^loitation, orthodox sense,
25, 93 n.

Exploitation, rate of, 8, 26, 40,
46, 97-8

relative rates of, 18-19
E^ort surplus, 56

Eactory Acts, 36

Gesell, 51, 87
Gold, 66, 73 n., 79

Grggoiy, 208
Guillebaud, 65 n.

Hegel, 15
Hobson, 51

House-building, 83, 109

Imperialism, 3, 112
Inequality of income, and sav-
ing, 76 j see also Under-
consumpiaon

Interest, rate of, 66, 82-4, 114
Hiventions, 12, 37, 38, 41, 86
Investment, 30, 62-6, 78-9
inducement to, 34, 59, 73,
86, 114

Ealeoki, 47, 97 n., 98 n., 109 n.
Keynes, 23 n., 51, 73, 75 n.,
net seq., 100, 107-8, 110,
115

Lexis, 92-3
Luxemburg, Bosa, 86

Macmillan Beport, 108
Marshall, 25, 50, 64 n., 75 n.,
76 n., 89 n., 95
Marx Engels Correspondence,
63 n., 107 n.

Moneybags, 21
Monopoly, 4, 96
Monopsony, 91, 108 n.

natural resources, 16, 61

AN ESSAY ON MARXIAN ECONOMICS

Organiccomposition of capital,
8, 17, 41

Pigou, 25, 70 n., 83 n., 99 n.,
100 n/

Productivity of capital, 21, 22
of labour, 20,-23, 38, 46
mmginal, 31, 43, 62
Profit margin, 88, 90, 98, 111
rate of, 7, 40, 42, 48-9$ 73
relative rates of, 12, 17, 69
Pursuit curve, 73

Quantity theoiy of money, 81

Bent, 12, 28, 61
absolute, 26 n.

Rentiers, 22, 82, 109
Besearch, 111-12
Beserve army, 35 et seg., 69,
85, 102

Bisk-bearing, 60, 71
Bobertson, 64 n. .

Bobinson Crusoe, 28 n.
Bobinson, Joan, 4Gn., 76 n.,
82 n., 108 n.

Bothbarth, w

Saving, 76 ; see also Invest-
ment

Say’s Law, 60, GO, 102, 104,
106

Smith, Adam, 91
Socially necessary labour, 7,
■16

Static equilibrium, 62, 70, 73

Subsistence level, see Wages

Substitution, 10, 63 .

Supply price of capital, 13, 68,
71, 113

Sinplus, 7 ; see also Profit

Technical progress, see Inven-
tions

Turnover, period of, 8, 42

TTnder-consumption, 57, 86,

86

Unpaid labour,- 8, 26 '

Use-value, 13

Utilisation of capital, 9, 48, 49,
89

Value, 7, 16, 23

and price, 16-18, 29-32
of labour-power, 14n., 36n.,
47-

Value, Price and Frqfit, 106 n.

Variable capital, 7 j see also
Organic composition

Voltaire, 27

Wages, and prices, 100-102,
106-7

of skill, 14, 23
real, 11, -35, 39, 43, 108
see also Elicitation

Waiting, 25, 64

WickseU, 67, 68

_Wolf, 18 n.

Working day, length of, 36, 46,
46

TEE EIH)

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